For the better part of the last three years, artificial intelligence (AI) has been Wall Street's hottest trend. Allowing software and systems to make split-second decisions without human oversight is viewed as a multitrillion-dollar opportunity that can reshape the growth trajectory of numerous industries.
But AI isn't the only game-changing technology making waves on Wall Street. The rise of quantum computing has investors excited, as evidenced by trailing-12-month gains in IonQ (IONQ +5.52%), Rigetti Computing (RGTI +5.18%), D-Wave Quantum (QBTS +4.56%), and Quantum Computing Inc. (QUBT +3.39%) ranging from 274% to 2,970%, as of the closing bell on Nov. 6.
Although quantum computing pure-play stocks can seemingly do no wrong at the moment, IonQ's highly anticipated operating results for the September-ended quarter exposed a grim reality for it and its peers in the months and quarters to come.
Image source: Getty Images.
On the surface, IonQ's triple-digit sales growth dazzled Wall Street
Wall Street's hottest trend relies on specialized computers and the theories of quantum mechanics to help businesses solve complex problems that classical computers either can't do or wouldn't be able to calculate during our lifetime. Examples include running rapid molecular interaction simulations to improve the clinical trial success rate for drug developers, as well as utilizing quantum computers to speed up the learning process of AI algorithms.
We're beginning to see these theoretical use cases translate into real-world utility with IonQ.
The company's leading position in qubit technology led to $39.9 million in third-quarter revenue, which was a clean 37% above its own prior sales guidance, and a cool 222% more than the prior-year period. Unsurprisingly, management also lifted IonQ's full-year sales guidance to a fresh range of $106 million to $110 million, which is, at the midpoint, about $17 million higher than the $91 million consensus from Wall Street analysts.
NYSE: IONQ
Key Data Points
IonQ also excited the quarter with a cash-rich balance sheet. It closed out September with around $1.5 billion in combined cash, cash equivalents, and various short- and long-term investments, and raised another $2 billion in mid-October via an equity offering.
In terms of its bottom line, IonQ's apples-to-apples operating loss more than tripled to $168.8 million in the latest quarter from the previous year, which was a bit more than Wall Street had anticipated.
But it's not IonQ's loss from operations that stands out as a sore thumb in its third-quarter report. Rather, it's the data point that has investors most excited.
Image source: Getty Images.
IonQ's sales growth highlights the unsustainability of quantum computing stock valuations
On the surface, the 222% year-over-year sales growth IonQ recorded in the September-ended quarter looks phenomenal. It also leaped over Wall Street's consensus by nearly $13 million. But what IonQ's operating results confirmed was the grim reality that no revenue beat would come close to being sufficient to support the current valuations of quantum computing pure-play stocks.
To be completely fair, "value" is a wholly subjective term that's going to vary from one investor to the next. What you feel is pricey might be viewed as a bargain by another investor. The lack of a perfect blueprint when valuing public companies is precisely why the stock market is so unpredictable.
However, there are a few valuation tools that leave little room for discussion -- especially when examined on a back-tested basis. The time-tested price-to-sales (P/S) ratio is one these trusted valuation metrics.
NASDAQ: RGTI
Key Data Points
In the months and quarters leading up to the bursting of the dot-com bubble in early 2000, the public companies leading the charge (think Cisco Systems, Amazon, and Microsoft) peaked at respective P/S ratios ranging from 31 to 43. This rough range of a trailing-12-month (TTM) P/S ratio of 30 to 40 has consistently served as a ceiling for public companies on the leading edge of a game-changing/hyped trend for three decades. It's also accurately foreshadowed future bubble-bursting events.
As of Nov. 6, the respective TTM P/S ratios of Wall Street's hottest pure-play quantum computing stocks were as follows:
- IonQ: 250
- Rigetti Computing: 1,102
- D-Wave Quantum: 326
- Quantum Computing Inc.: 6,190
Even with IonQ blowing Wall Street's sales consensus (and its own prior guidance) out of the water in the third quarter, it's hardly made a dent in what looks to be a completely unsustainable valuation multiple. Even if IonQ, Rigetti Computing, D-Wave Quantum, and Quantum Computing Inc. were to consistently surpass and lift their own respective revenue forecasts, their shares would have to go sideways for the next five to 10 years to justify their existing valuations!
NYSE: QBTS
Key Data Points
Of course, the P/S ratio isn't the only bit of historical precedent that's worrisome for quantum computing stocks.
For three decades, investors have watched every top-notch innovation and game-changing trend eventually navigate its way through an early innings bubble-bursting event. This is a roundabout way of saying that investors have consistently overshot the mark when it comes to the early adoption, utility, and optimization of a new technology or trend.
Quantum computers are in the very early stages of commercialization, with virtually all businesses utilizing this technology still in the process of figuring out how to optimize it and/or generate a positive return on their investment. It's going to take many years before quantum computing begins to pay real dividends for corporate America, which strongly suggests the hype bubble surrounding IonQ, Rigetti, D-Wave, and Quantum Computing Inc. is going to pop.
