Wall Street is nearly as excited about quantum computing as artificial intelligence (AI), and certain analysts expect triple-digit returns in IonQ (IONQ +2.53%) and D-Wave Quantum (QBTS +2.74%) during the next 12 months, as detailed below:
- John McPeake at Rosenblatt Securities recently set IonQ at a target price of $100 per share. That implies 132% upside from its current share price of $43.
- Quinn Bolton at Needham recently set D-Wave Quantum with a target price of $48 per share. That implies 128% upside from its current share price of $21.
Here's what investors should know.
Image source: Getty Images.
1. IonQ: 132% implied upside
IonQ uses trapped ions to develop quantum computers on the gate-based model, the most common framework. It benefits from vertical integration, meaning it controls much of its supply chain by building hardware, developing software, and delivering cloud-based services. IonQ is also the only provider with quantum systems available through all three major public clouds: Amazon, Microsoft, and Alphabet.
Generally speaking, trapped-ion technology produces more stable qubits (meaning ones that maintain fragile quantum states needed for calculations) than the superconducting technology used by D-Wave. However, trapped-ion technology is more difficult to scale due to engineering complexity, as multiple precisely aligned lasers are required to control the qubits.
Earlier this year, IonQ unveiled an ambitious roadmap that includes offering interconnected systems by 2028 and unlocking applications that require large logical (stable) qubit counts by 2030. "We believe that with this accelerated roadmap, IonQ will have the most logical qubits and the lowest manufacturing cost for commercial systems," according to the press release.
Importantly, while IBM believes it can build a fault-tolerant quantum computer on a large scale before the end of the decade, the company also acknowledges the technology's full potential will not be unlocked until 2033 at the earliest. Similarly, Alphabet CEO Sundar Pichai says useful quantum computers are five to 10 years away, likening the technology to artificial intelligence in the 2010s.
So, the market has been hasty. Buying shares of Nvidia in 2015 would have been a brilliant decision, but shares traded at that time no higher than 3.8 times sales. IonQ trades at 130 times sales. That is an absurd valuation. Also, IonQ is rapidly diluting shareholders, as the number of outstanding shares has increased 60% this year alone.
Investors should avoid this stock until it trades at a much more reasonable price.
2. D-Wave Quantum: 128% implied upside
D-Wave uses superconducting processors to develop quantum computers based on the annealing model, which lacks the general utility of gate-based systems but is more useful in solving optimization problems. For example, Volkswagen has used D-Wave's technology to simulate and optimize taxi routes through the congested streets of Beijing.
D-Wave is not as vertically integrated as IonQ because it does not manufacture its own processors, but annealing systems are more tolerant of noise, making them more scalable than gate-based systems. Put differently, D-Wave's systems currently have more real-world applications than IonQ's systems. In fact, D-Wave was the first company to commercialize quantum computers and cloud quantum services.
For investors, D-Wave Quantum's situation is similar to that of IonQ. It competes in a field that promises to revolutionize numerous industries, and the company may have a durable advantage due to its first-mover status. But the valuation is absurd, and D-Wave is diluting its shareholders. The stock currently trades at 246 times sales, and the number of outstanding shares has increased 31% this year.
To be clear, shares of D-Wave (and IonQ) could move much higher from here, perhaps as high as the most bullish Wall Street analysts expect. But I think investors should avoid the stocks because the risk-reward profile is skewed toward risk in both cases. That does not mean write them off completely, but rather wait for the bubble-like valuations to dissipate before buying shares.
