The share prices of many quantum computing stocks have skyrocketed over the past few years as investors try to get in on the ground floor of what will be the next big thing in tech. But the danger of moving too quickly into a new trend is that if the market fails to mature, you can be left holding on to stocks that have failed to measure up.
That's why it's difficult to determine whether quantum computing company IonQ (IONQ 7.81%) is a good investment. The stock has surged 458% over the past year, giving investors the feeling that this company can't lose. But is it true? Here's why I think investors should pass on IonQ despite the gains.
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1. It's still the early innings for quantum computing
Many large tech companies such as Alphabet and Microsoft are investing heavily in quantum computing, and they hope it will one day transform how we analyze data, develop new pharmaceuticals, and potentially create more advanced AI models.
But we're still in the early innings of quantum computing, and even Alphabet and Microsoft have said that the practical applications of the technology are still years away, though getting closer.
There's nothing wrong with buying stocks in companies that are making big bets on new ideas, but there's a difference between investing and speculating. IonQ is a quantum computing pure play -- as opposed to Alphabet or Microsoft, which have many profitable businesses in current industries. So buying the stock right now is essentially a hope that quantum computing eventually materializes into its estimated $1.3 trillion market size by 2035.
2. IonQ's financial results should make investors pause
IonQ reported a revenue increase of 82% in Q2 to $20.7 million, and the increase in sales was enough to beat the analysts' consensus estimate by about 15%.
But it was the company's widening losses that investors should pay attention to here. IonQ reported a loss of $0.70 per share in the quarter, much worse than its loss of $0.18 in the year-ago quarter. High-growth companies aren't always profitable, but the problem is that quantum computing itself is unproven and IonQ is losing significant money at the same time.
Widening losses mean IonQ could take a long time to reach profitability, and it's unclear if the company's increasing revenue will be enough to reinvest in the company as it waits for quantum computing to take shape.
NYSE: IONQ
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3. The company's stock price is too big for its britches
If we combine the two facts that quantum computing is mostly an unproven market and IonQ is significantly unprofitable, it starts to make the company's share price gains of 458% over the past 12 months look a little ridiculous.
I don't think it's a stretch to say that the market has gotten a bit frothy right now, especially among tech stocks, and the euphoria has pushed some stocks, including IonQ, beyond a reasonable valuation. For example, IonQ has a price-to-sales ratio of 210 right now, which is extremely expensive by any measure. For reference, the average P/S ratio for internet software companies right now is 7.
Some investors may be catching on, which may be why IonQ's shares are essentially flat year to date while the S&P 500 is up nearly 8%. I think the company's astronomical share price gains paired with widening losses should be a red flag for investors considering buying IonQ.
Could IonQ eventually become a profitable quantum computing company with a much more reasonable valuation? Sure. But as it stands right now, the stock looks like a speculative bet on an unproven market.
