Quantum computing stocks have been hit heavily by a sell-off. Most of the best-known names in the sector have lost about half of their value from their peak, and D-Wave Quantum (QBTS +5.39%) is no exception.
D-Wave is down around 50% from its all-time high, which is frustrating for those who bought near the top. But is the stock headed back up? The quantum computing market is projected to be significant, and D-Wave has a unique approach to the industry. This combination could result in explosive growth, but is it enough to make a millionaire out of folks buying on this dip?
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D-Wave's approach is different
D-Wave uses a technology called quantum annealing to power its quantum computers. It's using this technique because it isn't trying to create a general-purpose quantum computer like some of its peers, and this technique tailors itself to optimization problems, like those in logistics networks, artificial intelligence (AI) inference, statistical modeling, and weather prediction.
Those are expected to be some of the primary initial use cases for quantum computing, so making a platform that's tailored to these applications is a smart move by D-Wave. On the flip side, it could limit its upside potential, further decreasing the odds of it being a millionaire-maker stock. Keep in mind that for $10,000 to turn into a $1 million, it would need to grow nearly 10,000%.
NYSE: QBTS
Key Data Points
One item quantum computing investors must understand is that commercially viable quantum computing is still years away. Most companies point to 2030 as the turning point, so stretching this analysis five years beyond that for the market to mature is the best bet. McKinsey & Company estimates that quantum computing revenue could be up to $72 billion in 2035, but is that enough for D-Wave Quantum to turn a smallish investment into $1 million?
A 100x return is too aggressive for D-Wave Quantum
If you had $999,000 to invest, it would not be that hard to become a millionaire from there. But if we start at a more reasonable starting investment of $10,000, that would require 100x returns over the next decade to turn into $1 million in 10 years, which is an impressive feat that few companies have accomplished.
One recent example is Nvidia, which has turned a $10,000 investment a decade ago into $2.5 million. With D-Wave coming into a similar space, is this a realistic trajectory that it could follow?
I don't think so.
To do some math, let's take that $72 billion estimate and give that all to D-Wave as revenue in this rosiest of scenarios, which would not happen, given competition. But should D-Wave generate $72 billion in annual revenue by 2035, achieve a 30% profit margin, and trade at 30 times earnings, that would value the company at $648 billion. At D-Wave's current $8.2 billion market cap, that wouldn't be enough to achieve 100x returns. .
Is the stock a buy?
But could D-Wave still be a worthy investment? I'm not sure. D-Wave may develop a winning quantum computing solution, but it's competing against other strong companies that have deeper pockets and more accurate technology. Furthermore, D-Wave's quantum annealing approach limits its potential applications, which isn't great when trying to find stocks that would achieve 100x returns.
The high-risk, high-reward nature of D-Wave's stock isn't for every investor, and even after the sell-off, a lot of the reward is still priced into the stock, even though there's no guarantee that it will end up being the ultimate winner. As a result, I think investors should mostly avoid this stock and look for alternative investments that are more promising and reliable.
