When thinking about quantum computing, names such as Nvidia, Alphabet, Microsoft, or Amazon might come to mind. Each of these companies has developed custom chips and software focused on quantum computing technology -- providing them with even more opportunity to dominate the artificial intelligence (AI) landscape.
But what if I told you that over the last year, Nvidia is the only stock in this peer set that has generated a better total return than the S&P 500 and Nasdaq Composite?
Beyond the megacap technology stocks, IonQ (IONQ 2.19%) has emerged as a budding opportunity in the quantum computing realm. Over the last year, IonQ stock has risen by a staggering 432% -- absolutely crushing the S&P 500 and Nasdaq indexes, which have risen by 11% and 13%, respectively.
Is IonQ stock set up to continue beating the market? Read on to find out.
NYSE: IONQ
Key Data Points
IonQ stock is scorching hot right now, but...
It's important to understand that when a new megatrend emerges, individual opportunities underneath the broader umbrella tend to follow. What I mean by that is throughout the AI revolution, investors have (for the most part) been following the same subsectors such as enterprise software, cloud computing infrastructure, and semiconductor chips.
While quantum computing is an enormous market opportunity, it's not exactly scaling at the same pace as chips or software right now. For this reason, I tend to view quantum computing as more of a trendy, new pocket of the AI realm that appears promising but has little traction to prove it.
Not even a year ago, IonQ was trading near penny stock levels. Still, despite a nearly sevenfold rise in its share price, IonQ stock is "only" $45. Well, smart investors understand that share price is only one parameter when assessing a company's valuation.
Let's dig into IonQ's financial profile to help assess if the stock is overvalued or trading for a reasonable price.
Image source: Getty Images.
... does the valuation make any sense?
Over the last year, IonQ generated $43 million in revenue. Sure, the company's sales trajectory might look encouraging, but look at that cash burn. While raking in tens of millions in revenue, IonQ burned through more than $300 million -- and the trend is getting worse!
IONQ Revenue (TTM) data by YCharts
Despite this inverse relationship between sales and profits, IonQ's market cap has continued to soar. At an $11.7 billion market capitalization, IonQ currently trades for a price-to-sales (P/S) multiple of 238. That is almost tenfold the P/S ratio of Nvidia.
Is IonQ stock a buy right now?
I think IonQ is a speculative stock to own and its valuation seems unjustified to me. While the stock has outperformed the broader market over the last year, I suspect much of the rise in the share price has to do with optimistic narratives surrounding quantum computing coupled with investor fatigue in the usual suspects (i.e., the "Magnificent Seven").
While I'm intrigued by quantum computing, it's not an area that's enticed me enough to follow the momentum currently fueling IonQ stock to new highs. Instead, owning stocks such as Nvidia, Amazon, Microsoft, Alphabet, or even IBM can provide investors with exposure to quantum computing while also achieving some level of insulation since you will be diversified in other areas of the broader AI market, too.
I would pass on IonQ stock right now. Given its parabolic rise in such a short time frame, I think it's more likely the stock will take a breather rather than continue crushing the market.
