Over the last couple of years, investors have witnessed a sharp rise in certain pockets of the technology realm thanks to rising interest in artificial intelligence (AI). Companies operating across industries such as semiconductors, enterprise software, and cloud computing have been particular beneficiaries of AI investment so far.
Within the last year, however, quantum computing stocks have started to emerge as a new trend fueling the AI revolution.
IonQ, Rigetti Computing, and even Nvidia are common names surrounding the quantum computing narrative. However, what if I told you there is another quantum computing stock that has outperformed all three of the leaders above?
As of the closing bell on June 27, shares of D-Wave Quantum (QBTS 5.13%) have gained 67% so far this year -- absolutely trouncing the performances of its peers.
Let's explore the driving force behind D-Wave's monster price action and assess if now is a good opportunity to scoop up some shares.
NYSE: QBTS
Key Data Points
Quantum computing could be the next pillar supporting the AI revolution
While quantum computing is not yet widely commercialized, technology enthusiasts have become interested in its development due to its advantages over classic computers. Quantum computers are believed to possess superior processing power compared to today's most sophisticated computers.
In theory, this could lead to greater efficiency advantages in solving complex problems across industries such as energy, financial services, and pharmaceuticals. Global management consulting firm McKinsey & Company estimates that quantum computing could generate $1.3 trillion in economic value by the middle of next decade.
Considering that the world's largest AI developers such as Alphabet, Microsoft, Amazon, IBM, and Nvidia are all building quantum computing hardware and software, I'm optimistic that the opportunity could be quite lucrative in the long run.
Image source: Getty Images.
D-Wave Quantum's growth is jaw-dropping, but there's a catch
The charts below illustrate growth in D-Wave's revenue and cash balance over the last year. As indicated by the steep slope of each line, D-Wave's growth appears to be hitting a new stride.
QBTS Revenue (TTM) data by YCharts
With first-quarter revenue soaring by 509% year over year and ample cash on the balance sheet, I suspect some investors are looking past some subtle nuances from the financial profile above and pouring into D-Wave stock.
Smart investors understand this magnitude of growth is less impressive considering D-Wave only generated $15 million of sales during the quarter. With that in mind, it becomes clear that the majority of D-Wave's revenue base over the last 12 months was concentrated in a single quarter. To me, this makes the company's ongoing trajectory somewhat uncertain and potentially lumpy given the lack of scale D-Wave has achieved so far.
Moreover, despite its small revenue figures, D-Wave's cash balance skyrocketed by about $126 million during the first quarter. Per the company's 10Q filing, D-Wave raised this capital through an at-the-money (ATM) offering.
Another way of looking at this is that D-Wave is not yet generating profitability that it can reinvest back into the business. Rather, the company is taking advantage of its rising stock price by issuing new shares at an inflated valuation in order to raise capital.
Is D-Wave Quantum stock a buy right now?
As of this writing, D-Wave boasts a market capitalization of roughly $4.5 billion. Given the company's trailing-12-month sales of just $21 million, this implies that D-Wave trades for a price-to-sales (P/S) multiple of about 150.
As the chart below illustrates, D-Wave's P/S ratio is roughly 4 times higher than some of the peak multiples investors witnessed in names such as Amazon and Cisco during the dot-com bubble in the late 1990s.
QBTS PS Ratio data by YCharts
Not only do I think D-Wave's valuation is unsustainable, but management may think so, too.
According to recent filings, D-Wave is considering raising an additional $400 million through subsequent stock issuances. In my eyes, a move like this could suggest that management understands that the company's stock is overbought, and therefore is willing to dilute shareholders in order to take advantage of a frothy, overstretched valuation to raise additional funds.
While I understand the excitement surrounding quantum computing, I think shares of D-Wave Quantum have gotten ahead of themselves. The company is trading for a premium valuation, despite being a highly speculative opportunity at this time.
I would pass on investing in D-Wave Quantum stock right now and instead opt for more established companies with strong footholds in the AI landscape.
