Quantum computing has the potential to emerge as a huge market over the next few decades. The promise of this technology is tremendous, as it could bring major advancements in areas such as drug development, materials science, logistics, cybersecurity, artificial intelligence, and even weather modeling -- assuming it pans out. The question for investors is, which of the many companies attempting to develop this technology are most likely to capture major shares of that market?
One of the more popular picks in this space is IonQ (IONQ 0.80%). It is a pure play -- it's pursuing only quantum computing. This makes it a high-risk, high-potential-reward stock, so it could make its shareholders a ton of money... or it could go to zero.
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A crowded industry
Quantum computing is an extremely complex field. Dozens of companies are competing to bring workable machines to market and grab market share. Moreover, there are a number of different technological approaches being pursued, and it's possible that not all of them will prove commercially viable. Many of these companies are likely to come up short.
Meanwhile, most of the start-ups like IonQ have little to no revenue, and are largely relying on equity sales, research contracts, or both to fund their operations. Those aren't easy conditions to operate under -- these startups must continue producing positive results or their investors and partners may look elsewhere.
On the other side of the quantum computing realm are massive legacy tech players like Alphabet, Microsoft, and IBM. Thanks to their profitable established businesses, these companies have enormous resources to devote to their quantum computing development efforts. For reference, Alphabet generated over $150 billion in cash from operations over the past 12 months and has nearly $100 billion in cash and short-term investments on its books. Compare that to IonQ, which has about $1 billion, which it's burning through to fund its operations and R&D.
This makes it an uphill battle for the pure plays, but David-and-Goliath stories exist for a reason.
The quantum computing market won't be relevant for years
McKinsey & Company gave its projection for a potential quantum computing market opportunity of $72 billion by 2035 as the high end of a range, the bottom of which was $28 billion. The wideness of that range highlights a key point about the quantum computing industry: Nobody really knows what is going to happen in it.
Quantum computing companies are still vying to produce viable products, and thus far, they haven't delivered ones that provide useful advantages over currently available tech. While IonQ is leading the way in terms of quantum computing accuracy (it set a new world record for accuracy in October), its error levels are still a long way away from a level that would make its machines commercially viable.
Moreover, there are many different types of quantum computers under development, and each of the various models is better suited to some potential use cases, while less suitable for others. There will almost certainly be some areas where IonQ's products aren't the optimal choice.
With that in mind, I think there's almost a 0% chance that IonQ can capture all of a $72 billion market opportunity by 2035. There are too many uncertainties, too many headwinds, and too much competition. However, there's still a chance that IonQ will be a winner in the space and grow to become a meaningful company, making its shareholders a nice profit along the way. But potential investors must recognize that there are high risks to holding this stock and that they will need to be patient over the next decade while quantum computing technology matures.
If you are willing to wait a decade to see how IonQ's efforts pan out, then I think it can be a worthwhile investment. However, if you're not willing to stay patient, then you're just trading in and out of a ticker, not investing in the company. I think the first option is the better path, but investors need to size their positions appropriately for the level of risk they're taking on.
