Artificial intelligence has undoubtedly been the most popular investment theme of the past three years, but quantum computing has been a close second. Consider the returns posted by these pure-play quantum stocks since January 2023:
- Shares of Rigetti Computing (RGTI +0.16%) have advanced 3,210%.
- Shares of D-Wave Quantum (QBTS 3.05%) have advanced 1,970%.
- Shares of IonQ (IONQ +1.35%) have advanced 1,290%.
However, quantum computing is still a microscopic market, and the returns above have not been supported by equivalent sales or earnings growth. As a result, the three stocks have attained bubble-like valuations that are likely to collapse. Here are the important details.
Image source: Getty Images.
General-purpose quantum computers are a decade or two from being useful to most enterprises
Qubits are the fundamental unit of information in quantum computers. They are analogous to bits (binary digits) in classical computers, but they encode more information and have unique qualities that let quantum computers solve certain problems with far greater efficiency.
However, quantum systems are prone to errors, because qubits are very sensitive to noise like vibrations and temperature changes. No company has yet built a large-scale, fault-tolerant quantum computer, meaning a system that fixes errors in real time and has enough physical qubits to perform useful calculations.
Experts estimate quantum computers will need tens of thousands to millions of physical qubits to be useful to most enterprises. No company builds systems close to that range today.
- Rigetti specializes in superconducting quantum computing. Its most advanced systems have about 100 qubits. The company plans to launch 1,000-qubit systems around the end of 2027.
- D-Wave specializes in quantum annealing. Its most advanced systems have about 5,000 qubits, but its annealers cannot run most quantum algorithms because they are designed for optimization problems.
- IonQ specializes in trapped-ion quantum computing. Its most advanced systems have about 100 qubits. The company hopes to build 20,000-qubit systems by 2028.
The number of physical qubits needed for useful calculations depends on the application. The Haas School of Business at the University of California, Berkeley, estimates quantum systems will be useful in drug discovery and financial risk analysis by 2040. But Alphabet CEO Sundar Pichai says quantum systems will have some practical utility within a decade.
So what? The quantum computing market is microscopic today, and that will not change anytime soon. Grand View Research estimates quantum computing sales will reach $4.2 billion in 2030. Comparatively, artificial intelligence (AI) spending is projected to total $1.8 trillion by 2030, meaning the AI market will still be 425 times bigger.
NASDAQ: RGTI
Key Data Points
Rigetti, D-Wave, and IonQ trade at absurdly expensive valuations
Investors often use price-to-sales (P/S) ratios to evaluate companies that are not profitable. Rigetti, D-Wave, and IonQ fit that bill, and all three stocks have P/S multiples that are off the charts.
- Rigetti shares trade at 928 times sales. The company's revenue is projected to increase at 124% annually through 2027.
- D-Wave shares trade at 362 times sales. The company's revenue is projected to increase at 69% annually through 2027.
- IonQ shares trade at 150 times sales. The company's revenue is projected to increase at 84% annually through 2027.
I've heard some pundits argue that, since useful quantum computers are a decade away, buying Rigetti, D-Wave, or IonQ today could be like buying Nvidia in the mid-2010s. There is a huge problem with that: Nvidia traded at an average of 2.8 times sales in 2015, meaning it was about 330 times cheaper than Rigetti, 130 times cheaper than D-Wave, and 55 times cheaper than IonQ.
Here is another way to look at the situation: The three most expensive stocks in the S&P 500 currently trade at an average of 55 times sales. The quantum computing stocks discussed are several times more expensive. Indeed, to merely align with that rich valuation, Rigetti would need to fall 94%, D-Wave would need to fall 84%, and IonQ would need to fall 63%.
Here's the bottom line: While quantum computing promises to revolutionize fields like financial risk analysis, drug discovery, and even artificial intelligence, those breakthroughs are likely at least a decade away. Yet, Rigetti, D-Wave, and IonQ have bubble-like valuations that are virtually bound to collapse at some point. After three years of monster returns, I think the crash could happen in 2026.
