Investors are all over artificial intelligence (AI) stocks at the moment. Slowly, hype has grown around quantum computing stocks such as IonQ (IONQ +0.09%) as well.
IonQ promises a revolution across the entire computing world through quantum computing, which could not only supercharge growth in the AI market, but upend close to a century of traditional computing methods that are semiconductor based.
IonQ stock is up close to 500% in the last year on the backs of this growing popularity of quantum computing stocks, and the company just raised a billion dollars to further its research.
Here's my prediction for what comes next for IonQ and other quantum computing companies.
Image source: Getty Images.
Early days of the technology
By using complicated quantum mechanics, quantum computers can (theoretically) instantly solve hypercomplex problems that would take years for traditional supercomputers to calculate. This promise of a radical advance in computing power could unlock economic gains and wealth for the entire globe, while helping humans solve some of their greatest problems. This narrative has driven the growth of quantum computing stocks, with IonQ now sporting a market cap of $11.8 billion.
IonQ aims to build a working quantum computer and outsource it through the cloud providers. The problem is, today these quantum computers are highly difficult to make stable, making them generally unusable except for scientific research around quantum computing itself. Revenue for IonQ was just $43 million over the last 12 months, while free cash flow was -$140 million.
Investors can see the high research costs around quantum computing in IonQ's latest quarterly earnings. It generated $7.5 million in revenue last quarter, but spent close to $40 million on research and development. This trend will likely continue unless the company can make more scientific advances to improve the workability of quantum computers for commercial processes.
It does not look like an easy task. Huge technology players such as Alphabet are spending a ton of money to research quantum computing and are still stuck in the research process like IonQ. There is a lot of promise, but the road ahead looks difficult to build working quantum computers that will disrupt semiconductor-based systems.
NYSE: IONQ
Key Data Points
Raising $1 billion
To take advantage of its rising stock price, IonQ just sold $1 billion worth of its common stock, mainly in the form of warrants. This will give it more than $1.5 billion in cash to keep funding its ambitions, which are getting increasingly expensive as its free cash flow gets worse and worse every year since going public.
While this may be a good thing for funding the business, it is not necessarily a good indicator of a great long-term investment. A new share offering will be used for research purposes, and it is not guaranteed to turn into future profits that can be redistributed to shareholders. Share offerings are not free and dilute existing shareholders, who now own a smaller piece of this company.
Since going public in late 2021, IonQ's total shares outstanding are up around 30%, a trend that will continue in the years to come. This will be a headwind to stock price performance over the long haul.
IONQ Free Cash Flow data by YCharts
What comes next for IonQ?
When looking at the business (or lack thereof) for IonQ, the near future looks a lot like the past: research and development. Investors who own IonQ are betting on a radical breakthrough in quantum computing technology that would be a once-in-a-century scientific discovery. My money would be on this not happening.
What is likely to occur with IonQ's stock price is a struggle to generate further gains for shareholders from here. IonQ has a market cap of more than $11 billion -- which will get expanded further due to this stock offering -- and revenue below $50 million. The company is not profitable, and will not be for a long time. It is competing with the large technology players, who are also racing to solve quantum computing.
If you are going to bet on a quantum breakthrough, do it by owning diversified technology players such as Alphabet (parent company of Google). That way, if quantum computing is actually not achievable within the next decade, you don't risk your stock price going to $0. That could easily happen with IonQ if no further quantum breakthroughs occur.
