Quantum computing has quickly become one of the most popular technologies to invest in after artificial intelligence. Just take a look at the share price gains of some of the biggest names in the industry -- IonQ (IONQ +0.27%), Rigetti Computing (RGTI +4.72%), and D-Wave (QBTS +3.89%), which are up 89%, 1,500%, and 1,800% over the past year, respectively.
There's good reason for some of the optimism. Quantum computing will eventually aid scientists in discovering new drugs, enhancing climate science, developing new materials, and refining artificial intelligence models. Estimates from BCG suggest that the potential economic value of quantum computing could reach $850 billion by 2040.
However, there's also a good reason to be a bit skeptical. With massive run-ups like these quantum computing stocks are experiencing -- though IonQ's is negligible in comparison -- it's a good time to remember that quantum computing is still in its very early stages. Here are two hurdles the industry needs to overcome before people start investing in quantum computing stocks.
Image source: Getty Images.
1. Quantum computers still get things wrong -- a lot
One of the biggest hurdles with quantum computers is that their processing is so complex that they have high error rates. Progress is being made on this front, and most quantum computing companies say that their systems are helping to reduce error rates.
Nonetheless, for the technology to be truly transformative, error rates will need to be significantly lower than they are now. To help achieve this, some tech leaders, including Nvidia (NVDA +1.66%) CEO Jensen Huang, believe that combining traditional supercomputers with quantum computers is the way forward.
The idea is that traditional supercomputers will handle the computing tasks in which they excel, which helps reduce errors. At the same time, quantum computers take on larger modeling tasks that even supercomputers can't handle. IonQ and Rigetti are already collaborating with Nvidia on the hybrid concept.
Still, it could be years before error rates are low enough to get some of the biggest benefits from quantum computers. Even Alphabet (GOOG 0.16%) (GOOGL 0.11%), which released a new quantum computing processor called Willow last year, has hinted that these systems aren't really ready for prime time yet. CEO Sundar Pichai said earlier this year:"Willow is an important step in our journey to build a useful quantum computer with practical applications."
In other words, quantum computing is getting there, but it's not quite there yet.
NYSE: IONQ
Key Data Points
2. Revenue is very low, while losses and spending are high
Quantum computing is still a speculative investment by almost any measure. One of the primary reasons this matters to investors is that the high-flying stocks in the industry typically have minimal revenue and are largely unprofitable. Here's a quick look at the revenue, losses, and operating expenses for IonQ, Rigetti, and D-Wave in the most recent quarter.
|
Company |
Q3 Revenue |
Q3 Operating Expenses |
Q3 Net Loss |
|---|---|---|---|
|
IonQ |
$39.9 million |
$208 million |
($1.1 billion) |
|
Rigetti |
$1.9 million |
$20.9 million |
($201 million) |
|
D-Wave |
$3.7 million |
$30.4 million |
($140 million) |
Data source: IonQ, Rigetti, and D-Wave.
As you can see, all these companies have negligible sales compared to their losses. Their operating expenses are sizable as the companies spend money to run their business and invest in technology. While being unprofitable isn't unusual for growth companies, I believe it's particularly concerning for shareholders of these quantum computing stocks.
Consider that as their share prices have skyrocketed, their valuations have surged to dizzying levels. The price-to-sales (P/S) ratio for IonQ is 148, Rigetti's is 964,, and D-Wave's is 282. That's compared to the tech industry's average P/S ratio of about 9.
That's a recipe for a potentially massive pullback from these stocks if the companies fail to generate meaningful sales and reach profitability. The market is already starting to become impatient with a potential AI bubble, but at least many artificial intelligence companies have profits to support their share price gains.
I don't think quantum computing will be a bust in the long term, but investors certainly seem to be overly optimistic about IonQ, Rigetti, and D-Wave. These companies still have a long way to go before they become profitable, and there's no guarantee they'll ever reach that goal.
