The Trump administration has already taken a stake in Intel and three minerals companies, and it recently turned its attention to quantum computing. The Commerce Department is reportedly in talks with D-Wave Quantum (QBTS 1.26%), IonQ (IONQ 0.20%), and Rigetti Computing (RGTI +0.21%) about the government receiving an equity position in exchange for funding, according to The Wall Street Journal.
Should you buy the stocks?
Image source: Official White House Photo. President Donald Trump attends the swearing-in of Commerce Secretary Howard Lutnick.
Quantum computing may be a decade away (or more) from mainstream utility
Quantum computers cannot speed up everyday computing tasks, but they can solve some problems that would be very time-consuming (if not impossible) for classical computers. For instance, quantum computers are particularly good at optimizing processes with many complex variables, which has use cases across drug discovery, finance, materials science, and supply chain management.
However, quantum computing is still experimental and most organizations would get little (if any) value from the technology today. Quantum computers are not only expensive, but also difficult to scale and limited by high error rates. Alphabet CEO Sundar Pichai recently said practical applications are at least five to 10 years away, and he compared the state of the industry to artificial intelligence in the 2010s.
Nvidia CEO Jensen Huang has made similar comments, estimating commercially useful quantum computers could be two decades away. Investors should consider this context: The cloud computing market is forecast to reach $2.4 trillion by 2030, but the quantum computing industry will be worth just $4 billion (600 times less), according to Grand View Research.
Valuations across the quantum computing industry are sky-high
D-Wave, IonQ, and Rigetti are deeply unprofitable. Over the past year, the first two companies burned twice as much cash as they earned in revenue, and Rigetti burned six times as much cash. The other problem is their valuations. All three stocks trade at price-to-sales (PS) ratios that are nonsensical when compared to forecasted sales growth.
- D-Wave Quantum currently trades at 500 time sales. Wall Street expects sales to grow at 57% annually to reach $109 million in 2028. If that happens, the stock would still trade at 103 times sales even with no share price appreciation.
- IonQ currently trades at 340 times sales. Wall Street expects sales to grow at 90% annually to reach $492 million in 2028. If that happens, the stock would still trade at 36 times sales even with no share price appreciation.
- Rigetti Computing current trades at 1,590 times sales. Wall Street expects sales to grow at 90% annually to reach $75 million in 2028. If that happens, the stock would still trade at 168 times sales even with no share price appreciation.
Here is context for those valuations: Currently, 498 stocks in the S&P 500 have PS multiples below 35. That means D-Wave, IonQ, and Rigetti would still be very expensive three-plus years from now even if their stock prices stay the same. And even that disappointing outcome is contingent upon these companies meeting very high expectations on Wall Street.
Better buying opportunities will likely to arise in the future
Quantum computing promises to be a transformative technology. But with mainstream use cases still several years away and valuations inflated across the industry, D-Wave, IonQ, and Rigetti are almost certainly in a bubble right now. The stocks may keep climbing in the near term, especially if the Trump administration takes a stake, but a major crash is almost unavoidable at some point.
Anecdotally, Nvidia dominates the artificial intelligence infrastructure market today, but its share price dropped more than 50% on three separate occasions during the last 15 years. All three crashes were fantastic buying opportunities in hindsight. So, investors who want exposure to quantum computing should wait for a similar opportunity with D-Wave, IonQ, and/or Rigetti.
