Over the last several months, a new pocket of the AI realm called quantum computing has started to garner quite a bit of attention from the investment community. What's unique, however, is that the usual suspects of Nvidia, Microsoft, Alphabet, and Amazon aren't really pegged to the rising interest in quantum computing technology.
Rather, a new cohort of rising stars such as Rigetti Computing, D-Wave Quantum, and IonQ (IONQ 4.15%) are among the most popular quantum computing stocks right now. With shares down by 25% from their peak over the last year, IonQ stock trades for roughly $40 as of this writing. Is now a good opportunity to pounce on the stock?
IonQ's popularity is fueling interest in quantum computing stocks, but...
Quantum computing is not a widely used application in artificial intelligence (AI) today. Yet despite its developmental stage, global management consulting firm McKinsey & Company is forecasting that quantum computing could be a $131 billion opportunity in the coming decades. With the potential for such enormous upside, it's not entirely surprising that investors were quick to look at which companies are involved with quantum computing development.
One reason that I think IonQ has emerged as a favorite in the quantum computing market is the company's impressive partnerships with cloud hyperscalers Microsoft, Amazon, and Alphabet. With the stock sliding as of late, investors may be wondering if the sell-off is an opportunity to buy the dip.
Image source: Getty Images.
... does the valuation actually make sense?
Despite working with major AI developers, IonQ has little to show in terms of tangible growth. Over the last year, the company has only generated $43 million in revenue. Meanwhile, the company's net losses are in the hundreds of millions (and worsening).
IONQ Revenue (TTM) data by YCharts
In a way, this financial profile actually makes some sense. As I alluded to above, quantum computing is not yet commercially used in AI development. Given those dynamics, IonQ's revenue potential is fairly limited for the time being. The unfortunate reality is that the company will likely remain a high-cash-burn operation as it continues building out its platform.
But still, for just $40 could IonQ be worth a look? Well, smart investors understand that the stock price alone does not determine the worth of a business. As of this writing, IonQ boasts a market capitalization of nearly $10 billion. This implies that IonQ is trading for a price-to-sales (P/S) ratio of 195.
Is IonQ stock a buy right now?
IonQ's P/S ratio is not just high; it is multiples above what investors witnessed during the peak euphoria of the dotcom bubble in the late 1990s. I bring this up because the prospects of quantum computing and the appearance of a low share price might tempt investors into chasing momentum -- mistakenly thinking they are buying a stock for a "cheap" price.
The reality is that IonQ stock is anything but cheap. Given the mounting losses pictured above, I suspect that IonQ could have a tough time financing future projects -- further limiting its ability to monetize and grow.
In my eyes, the current sell-off in IonQ stock could lead to further plummeting in the shares. I would not be surprised if IonQ begins to witness a significant valuation correction as more growth investors come to understand that they have been investing in a narrative around the company as opposed to an actual, concrete long-term thesis.
For these reasons, I would stay away from IonQ right now. Even with a 25% drop in share price, the valuation analysis explored above suggests the stock is still overbought and not yet trading for a reasonable price.
