For a majority of the last three decades, investors have had a game-changing technology or next-big-thing trend to captivate their attention. For instance, the artificial intelligence (AI) revolution is rewriting the growth potential for corporate America.
But in rare instances, more than one hyped tech trend can exist at the same time. The emergence of quantum computing, and the breakneck rallies witnessed in pure-play stocks like IonQ (IONQ +3.67%), Rigetti Computing (RGTI +4.04%), D-Wave Quantum (QBTS +2.63%), and Quantum Computing Inc. (QUBT +11.79%), speaks to the excitement of this new technology.
Image source: Getty Images.
Over the trailing year, as of the closing bell on Oct. 27, IonQ has rallied by a relatively tame 270%, while Rigetti, D-Wave, and Quantum Computing Inc. have skyrocketed 3,220%, 3,270%, and 1,340%, respectively. Gains of this magnitude tend to inspire the fear of missing out (FOMO) in investors.
Unfortunately, one time-tested indicator strongly suggests an epic reversal awaits Wall Street's quantum computing darlings.
Game-changing technologies take time to mature
Before digging into the specific metric that signals significant downside to come for IonQ, Rigetti Computing, D-Wave Quantum, and Quantum Computing Inc., we first have to lay the foundation of how gains of up to 3,270% materialized in just one year.
Quantum computers rely on the theories of quantum mechanics to solve complex problems that classical computers either can't do, or might take longer than our earthy existence to complete. The capacity for these specialized computers to run simulations and tackle non-traditional problem-solving gives this technology utility in a variety of industries and applications. It can be used to help drug developers increase their clinical trial success rate, improve weather forecasting, and can speed up the learning process of AI algorithms, to name a few use cases.
NYSE: IONQ
Key Data Points
Based on an analysis from Boston Consulting Group, quantum computing can create between $450 billion and $850 billion in global economic value by 2040. If this wide-ranging estimate is remotely in the ballpark, it would open the door for a long list of companies to be winners.
We've also observed some very early-stage wins and positive speculation among these pure-play businesses. Amazon's quantum cloud computing service, known as Braket, gives its subscribers access to IonQ's and Rigetti's quantum computers. There's also been rumored interest that the Donald Trump administration may want equity stakes in IonQ, Rigetti Computing, and/or D-Wave Quantum.
The concern is that history hasn't been kind to early-stage innovations. While game-changers like the internet did, eventually (keyword!), go on to change the landscape for corporate America, it took years to mature as a technology.
Quantum computing is such a nascent innovation at the moment that it's not even evident if it's being commercialized on a broad scale. It'll likely take years before businesses are optimizing quantum computing solutions or generating a positive return on their investments in this hyped trend.
Image source: Getty Images.
A reversal of fortune may be imminent for quantum computing stocks
But this historical trend isn't the prime worry for investors in these pure-play stocks. Rather, it's a valuation tool that has a flawless track record of forecasting future stock movement.
When most investors think about valuing stocks, they turn to the price-to-earnings (P/E) ratio. This popular measure of value is arrived at by dividing a company's share price by its trailing-12-month earnings per share (EPS). Unfortunately, the P/E ratio has little use for early-stage businesses that are losing money and have negative EPS.
For the quartet of quantum computing stocks that have fascinated Wall Street, the price-to-sales (P/S) ratio serves as a much better measure of value.
Looking back to the proliferation of the internet in 1999 and early 2000, public companies on the leading edge of this hyped technology peaked at P/S ratios ranging from 31 to 43. This included Amazon, Microsoft, and Cisco Systems. While this P/S range of 31 to 43 is by no means concrete, it's served as a relatively consistent ceiling for public companies spearheading next-big-thing trends.
NASDAQ: RGTI
Key Data Points
Here are the current trailing-12-month P/S ratios for Wall Street's quantum computing pure-play stocks, as of Oct. 27:
- IonQ: 273
- Rigetti Computing: 1,295
- D-Wave Quantum: 402
- Quantum Computing Inc.: 7,411
Considering that quantum computing is still in the process of being commercialized, some investors might not view this comparison as fair. With this in mind, here are the projected P/S ratios for the end of 2027, based on the current market cap for all four companies and their consensus 2027 sales estimate from Wall Street analysts:
- IonQ: 69
- Rigetti Computing: 326
- D-Wave Quantum: 169
- Quantum Computing Inc.: 352
Even giving quantum computing pure-play stocks more than two years of revenue growth runway would only reduce their respective P/S ratios to between 69 and 352. This is two to 10 times higher than the historical P/S range that history has repeatedly shown investors isn't sustainable over an extended period.
Based on the historically flawless P/S ratio, a share price reversal of epic proportions likely awaits IonQ, Rigetti Computing, D-Wave Quantum, and Quantum Computing Inc.
