Many people have probably heard about quantum computing, but still aren't sure what it is.
In a nutshell, quantum computers utilize the laws of quantum physics to perform complex calculations exponentially faster than even the most advanced supercomputers today. Such powerful technology could one day change the world.
That's why there are several quantum computing stocks, companies racing to develop and refine quantum computing technology. D-Wave Quantum (QBTS +3.55%) is among them.
D-Wave Quantum is up by over 120% since it went public via a SPAC merger in 2022. However, the stock has declined nearly 50% over the past couple of months. Should investors buy the dip?
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Exploring D-Wave Quantum's place in the field
First, it's crucial to understand just how early it is for quantum computing. It's not yet clear which quantum computers are better than others, the extent to which they might be useful for various applications, or the timeline for all of the above.
D-Wave Quantum is focusing its efforts on two avenues, as the only company actively developing both annealing and gate-model quantum computers. The former would specialize in optimization algorithms, while the latter are more general purpose. Notably, D-Wave Quantum aims to build a comprehensive quantum computing stack, encompassing hardware, software, and services.
Taking that approach could help the company lock customers into its products and services as a one-stop shop for quantum technology. At the same time, it's also riskier if customers want to utilize multiple solutions, and D-Wave Quantum's offerings aren't easily compatible with others.
Either way, it's too soon to know how the competitive landscape will unfold. The reality is that quantum computing for consistent commercial applications has not yet arrived, though it seems to be coming.
Thus far, D-Wave Quantum has generated just $24 million in revenue over the past year, making it a relatively small player compared to the enormous big-tech competitors, including International Business Machines, Alphabet, Microsoft, Amazon, and other pure-play quantum computing companies, such as IonQ.
Why investors should expect volatility
It's generally concerning when stocks fall 50% or more, but it might be par for the course if you own D-Wave Quantum or any other pure-play quantum computing stocks. To be clear, owning the stock means you're investing in potential that hasn't yet become a reality.
D-Wave Quantum trades at a market capitalization of roughly $8 billion, even after its decline. That's a price-to-sales ratio of over 330 times the company's trailing-12-month revenue, an eye-popping, high valuation for any stock, let alone one with so many questions about its future.
It's still unclear what the actual total addressable market for quantum computing will be a decade from now. McKinsey & Company estimates that it could be anywhere from $28 billion to $72 billion by 2035. However large it may be, it's anyone's guess who the winners will be. It's hard to bet against several "Magnificent Seven" companies developing quantum computers, at least for now.
Suppose D-Wave Quantum does carve out a chunk of the market. Will the company be profitable? These variables impact a stock's valuation, and yet, nobody can know the answers to any of these questions at this point.
D-Wave Quantum's massively inflated valuation is going to act like a rubber band, sending the stock bouncing around at the whim of the broader market's sentiment. Investors should anticipate more volatility ahead, potentially in both directions.
NYSE: QBTS
Key Data Points
Should investors buy the 50% dip in D-Wave Quantum?
Here is one way to think of the stock at these prices: Wouldn't one of these multitrillion-dollar tech companies scoop up D-Wave Quantum if they felt that it were on the cusp of a very lucrative quantum computing breakthrough? Considering quantum computing's long-term potential, it would seem silly not to if that were the case.
What about billionaire investors? Their wealth and status provide them with access to insights and information that the average person can only dream of. Yet it seems that Wall Street's wealthiest investors aren't too interested in D-Wave Quantum or the other early-stage quantum computing companies either.
It makes sense when you consider how competitive the quantum computing race is, D-Wave Quantum's low revenue, and the stock's prohibitively expensive price tag. Investors should probably follow the signs and look for better investment ideas elsewhere.
