Since the advent and proliferation of the internet in the mid-1990s, investors have pretty consistently had a game-changing technological innovation or sky-high addressable opportunity to captivate their attention (and their wallets). Things like genome decoding, nanotechnology, 3D printing, blockchain technology, the metaverse, and most recently the rise of artificial intelligence (AI), have excited investors.
But in rare instances, two next-big-thing trends have coexisted. In addition to AI lifting the benchmark S&P 500 and growth-driven Nasdaq Composite to new heights, Wall Street and investors are enthralled with the evolution of quantum computing.
Image source: Getty Images.
Without getting too far into the weeds, quantum computing relies on quantum mechanics to solve complex problems that classical computers are incapable of (at least in our lifetimes). Over the trailing year, the four hottest pure-play quantum computing stocks have skyrocketed by as much as 5,400%:
- IonQ (IONQ +4.92%): Up 720%
- Rigetti Computing (RGTI +3.48%): Up 5,400%
- D-Wave Quantum (QBTS +2.96%): Up 3,470%
- Quantum Computing Inc. (QUBT +0.63%): Up 2,800%
These are potentially life-altering gains for investors, which speaks to the long-term utility quantum computing solutions bring to the table.
There's just one problem: history has a flawless track record of foreshadowing trouble for game-changing technological innovations, and quantum computing just made the list.
Over multiple decades, quantum computing can be a game-changing innovation
On paper, there's no denying the possibilities that quantum computing solutions bring to the table. The ability to perform multiple calculations at once can vastly speed up problem-solving timelines and pave the way for fast and accurate simulations.
One of the many reasons quantum computing stocks are soaring is their potential symbiotic relationship with the artificial intelligence revolution. Quantum computers may be able to assist AI algorithms by fast-forwarding the process by which software and systems learn. Imagine expediting the timeline of large language model training, as well as empowering software and systems to learn new tasks (and become more proficient at them quickly) without the need for human intervention.
NYSE: IONQ
Key Data Points
Quantum computing also has meaningful application in the healthcare sector. Specialized computers may have the capacity to model complex molecular interactions through rapid simulations, which in turn can help researchers better tackle hard-to-treat and deadly diseases. In other words, it would help optimize clinical trials to maximize the likelihood of their success, and can give personalized treatment options a big boost.
Though these are just two broad-stroke examples of the rise of quantum computing in action, they represent just the tip of the iceberg. It's why the analysts at Boston Consulting Group believe this technology will create $450 billion to $850 billion in global economic value by 2040.
Figures this large are bound to attract investors, which also explains why shares of IonQ, Rigetti Computing, D-Wave Quantum, and Quantum Computing Inc. have moonshot higher.
If this technology is given ample time to mature, it can positively affect the growth arc for corporate America and may represent a technological leap forward on par with what the internet did for businesses. But over the coming months and years, history offers a different and generally unpleasant forecast for quantum computing investors.
Image source: Getty Images.
Historical precedent has quantum computing square in its sights
Although IonQ, Rigetti Computing, D-Wave Quantum, and Quantum Computing Inc. can seemingly do no wrong with investors for the moment, historical precedent offers two very clear warnings.
The first has to do with the proliferation of next-big-thing technologies and game-changing innovations. What history tells us is that every hyped technology and trend needs time to mature, without exception. However, investors have repeatedly overestimated how quickly a next-big-thing technology or trend would gain utility and/or be widely adopted by consumers or businesses.
While the advent of the internet did vastly improve the long-term growth potential for businesses, this prominently occurred after the dot-com bubble burst and the Nasdaq Composite lost 78% of its value on a peak-to-trough basis. Other popular trends, such as genome decoding, business-to-business commerce, China stocks, nanotechnology, 3D printing, blockchain technology, cannabis, and the metaverse all witnessed their bubbles burst in their early stages of hype and expansion.
In short, quantum computing's intrigue on paper isn't remotely close to translating into real-world results, as of yet. History doesn't mince words and shows this to be a recipe for an eventual bubble-bursting event.
NASDAQ: RGTI
Key Data Points
The foundational price-to-sales (P/S) ratio is the second historical marker that bodes poorly for quantum computing stocks.
When looking back to the mid-1990s, companies viewed as pioneers of a next-big-thing technology or trend have historically topped out at P/S ratios in the 30 to 40 range. While there's been a little bit of wiggle room for this range, it encompasses the vast majority of industry leaders.
Based on extremely fluid (i.e., likely unreliable) consensus revenue estimates four years from now for IonQ, Rigetti Computing, and D-Wave Quantum (Wall Street sales estimates for Quantum Computing Inc. don't go beyond 2027), these companies are valued at respective P/S ratios of 32, 95, and 54.
Keeping in mind that no company leading a next-big-thing trend has ever been able to sustain a trailing-12-month P/S ratio of 30 to 40 for an extended period, IonQ, Rigetti, and D-Wave are valued at or well above this mark when looking at sales projections four years into the future! History is making it crystal clear how unsustainable this run-up in quantum computing stocks is, relative to current and forecast revenue.
Though it's possible all four quantum computing pure-plays will be winners 10 years from now, historical precedent points to significant eventual losses for these stocks in the weeks, months, and/or years to come.
