Quantum computing is still one of the hottest sectors in the stock market, although it's quite volatile. It's not uncommon to see a stock rise or fall in the double-digit range every other day. However, quantum computing investors do not need to be concerned with what happens over the next week, month, or year. It's really what happens about five years from now, as that's when most companies agree that commercially viable quantum computing will be available.
One popular quantum computing stock that investors are digging into is D-Wave Quantum (QBTS +4.53%). D-Wave is taking a unique approach to the quantum computing industry, and it could be different enough that it can carve out a unique niche for its products. So, where will D-Wave be in five years? Let's find out.
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D-Wave Quantum isn't pursuing the same goal as its peers
If you look at most of the quantum computing competitors, each is trying to develop a quantum processing unit that is capable of doing all sorts of calculations and processing that traditional computing units already do, at a faster rate. D-Wave Quantum is different because its technology focuses on a technique called quantum annealing. Quantum annealing cannot be used for general-purpose computing. Instead, it has a significant use case in solving optimization problems.
The use cases for this technology are still rather large, and include logistics networks, statistics, artificial intelligence (AI) inference, and weather pattern modeling. These are expected to be some of the industries that are at the leading edge of quantum computing adoption, so this isn't a knock on D-Wave's potential market opportunity.
NYSE: QBTS
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D-Wave may also be able to find some success because it could outperform general-purpose quantum processing units. That space is very competitive, and pure plays like IonQ and Rigetti Computing are going up against established players like Microsoft and Alphabet. With D-Wave making its own path by taking a different approach, it's possible that it develops an attractive technology that could carve out its own niche.
But will that be enough to make D-Wave Quantum a successful stock pick over the next five years?
Quantum computing success is far from guaranteed
Most companies competing in the quantum computing race agree that useful quantum computing is still at least five years away, with most companies pointing toward 2030 as the year when commercially viable quantum computing becomes available. There's a lot that can happen between now and then, making D-Wave a high-risk, high-reward stock. The primary problem I have with D-Wave's stock right now is that a large part of that reward is already priced in.
D-Wave's stock is valued at an $11 billion market cap.
QBTS Market Cap data by YCharts
Clearly, the stock is overvalued at present, but investors aren't buying it for its current business state; they're buying it for its future. An $11 billion valuation still prices in a ton of success. If D-Wave can produce a profit margin of 20% and trade at 30 times earnings, it would require the company to generate $1.8 billion in annual revenue. For reference, D-Wave's revenue over the past 12 months totaled $22 million.
If D-Wave can bring a viable quantum computer to market within the next five years, that may be an achievable number to hit, but that's projecting the stock to stay flat over the next five years. The reality is, D-Wave's stock will likely take off like a rocket if it can generate sales leading up to that number. So, investors must take a huge risk today by investing in it.
For me, that's too much uncertainty because there is no guarantee that its technology will actually pan out. However, if you want to invest in D-Wave, I don't think there's any issue with it, but position sizing must be kept very small; that way, if it goes to $0, it won't wreck your overall returns.
