While quantum computing has been just around the corner for decades, investors seem to be taking it seriously this time. D-Wave Quantum (QBTS 15.44%) has benefited from the rising industry optimism, with its stock price up by an eyewatering 3,500% over the last 12 months. But past performance doesn't guarantee future performance.
In fact, D-Wave's rocketship rally has put potential new investors in a challenging position. On one hand, people have the fear of missing out on the quantum rally. But they also don't want to buy speculative stocks at the top of a mountain because of the risk of a crash. Let's dig deeper to see how the next three years might play out for the stock.
NYSE: QBTS
Key Data Points
The quantum annealing leader
D-Wave is pioneering a subset of quantum computing called quantum annealing, which involves building machines designed for solving optimization problems. In other words, these devices aim to find the lowest energy way to complete a task. While this is somewhat distinct from the general-purpose quantum computing being developed by industry leaders like Alphabet, it seems to be enjoying early successes.
D-Wave's second-quarter revenue jumped 42% year over year to $3.1 million as it sold a small number of its quantum annealing machines to research institutions around the world. That said, the company remains very far from profitability, with an operating loss of $26.5 million in the period. Investors shouldn't expect this situation to turn around anytime soon because of the massive spending needed for research and development as D-Wave seeks to pioneer cutting-edge technology.
Why is D-Wave public?
According to Silicon Valley Bank, the vast majority of successful start-ups are acquired by other companies -- very few reach public markets through initial public offerings (IPOs) or special purpose acquisition company (SPAC) deals like D-Wave Quantum. There are many good reasons for this. Chief among them is that small, unprofitable companies usually have valuable technology and patents that make more sense as part of a larger business that can absorb their losses.
As a public company, D-Wave has better access to capital markets. However, its shareholders will fund its losses through dilutive equity raises, which is when a company creates and issues more units of stock. In June, the company raised $400 million through stock sales, aiming to use the money for general corporate purposes and acquisitions of its own.
Capital raises can benefit investors if they are used to create future value. But the rising number of shares outstanding will chip away at shareholders' ownership in the company and their claim on future earnings, disincentivizing investors from buying the stock too early.
D-Wave's valuation is cause for concern
Image source: Getty Images.
While it's tempting to look at D-Wave as a tiny company trying to pioneer a big opportunity, that is no longer the case. After its 3,400% rally, the company is worth roughly $10 billion, which makes it a large-cap stock. Unfortunately, most of the easy returns have already been made, and now D-Wave is priced for perfection -- or perhaps more accurately, priced to disappoint as it struggles to justify its sky-high valuation.
So far, the numbers aren't looking good. With a price-to-sales (P/S) multiple of 336, shares trade at a substantial premium over the S&P 500 average of 3.35. And this suggests years (or even decades) of future growth are already priced in. While it can be tempting to bet on speculative stocks, fundamentals usually win out over the long term. Investors who missed the big rally should wait for a better entry point.
