With shares up 2,500% over the last 12 months, Quantum Computing (QUBT 1.82%) is sure to attract the attention of growth-focused investors. The stock is surging based on industrywide optimism. But is this rally driven by fundamentals or hype? Let's dig deeper into the pros and cons of Quantum Computing, also known as QCi, to decide if the shares are a solid long-term buy.
What is special about quantum computing?
Quantum computing is a branch of computer science and physics that aims to create devices capable of solving the world's most difficult problems exponentially faster than today's fastest supercomputers. And we aren't talking 30 minutes faster; we are talking over a million years faster. If the technology works, it will allow humans to do things that were previously impossible with current technology.
NASDAQ: QUBT
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It doesn't take a supercomputer to see the vast commercial opportunities that viable quantum computers could unlock. Analysts expect them to help rapidly discover new pharmaceutical drug candidates and chemical structures, and even help train artificial intelligence (AI) models.
Quantum Computing (QCi) aims to position itself on the picks-and-shovels side of this opportunity, supplying hardware products like chips, sensors, and communication devices. It also claims to have the first of its kind foundry for processing thin-film lithium niobate (TFLN), a next-generation material useful for advanced telecommunication platforms.
QCi's TFLN foundry is located in Tempe, Arizona, and its made-in-America approach could attract government support amid the accelerating technology arms race between the U.S. and China.
But what about the fundamentals?
While cutting-edge technologies often sound exciting, it is essential to remember that they won't always translate to commercial success, especially in the near term. Furthermore, the start-ups with the most valuable patents and processes are often acquired by larger companies or kept private to maximize returns for their owners. So when small speculative companies like QCi go public, it's important to ask why.
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The company's second-quarter earnings report gives some clues about the pressure it is under. Revenue collapsed 67% year over year to just $61,000 (that's less than the median annual salary of a U.S. tech worker). Meanwhile, operating costs are spiraling out of control, with research and development more than doubling to $5.98 million.
As a speculative tech company, QCi probably can't trim its research and development outflows too much without risking falling behind other players in the industry. And it is important to note that quantum computing is shaping up to be a competitive arena, with tech giants like Alphabet and Nvidia also aiming to establish themselves in the picks-and-shovels niche. These larger, well-capitalized companies will be able to spend more on research and leverage larger supply chains.
Is Quantum Computing a millionaire-maker stock?
QCi is clearly under a lot of pressure because of its minuscule revenue, heavy losses, and the pressure to keep up its research spending. By going public, management now has the ability to raise more money by creating and selling more units of its own stock. While this strategy keeps the business afloat, it can hurt existing shareholders by diluting their ownership stake in the company and their claim on its future profits.
In August, QCi announced a $500 million share offering, which increased its share count by a jaw-dropping 26.9 million. And the company already has 159,883,187 shares outstanding as of the second quarter. Expect this number to continue expanding over time.
While QCi could potentially be a millionaire-maker stock in the right conditions, the risks far outweigh the rewards right now. And fundamentals-focused investors should look for better opportunities.
