Quantum computing stocks have been in free fall. IonQ is down 34% year to date. Rigetti Computing is down 32% in the same time frame, and D-Wave Quantum is in the same boat.
For investors looking for a bargain, it's tempting to buy the dip on these pure-play quantum stocks. I would say they're still far from a bargain, and there are better ways to invest in quantum computing.
The pure-play problem
Image source: Getty Images.
Even after the sell-off, valuations across the sector are detached from reality. IonQ trades at 99 times sales. D-Wave trades at 217 times sales. Rigetti trades at roughly 600 times sales.
The revenue underpinning those multiples is pretty tiny. D-Wave generated just $3.7 million in its most recent quarter. IonQ brought in about $40 million. And instead of narrowing their losses as they scale, these companies are burning cash faster.
Now, investing in these companies is all about their potential to deliver markedly more revenue in the future. But I think there's way too much growth already baked into these stock prices and a fundamental timeline issue. The fact is, no one knows when -- or if -- this technology will deliver serious returns. It could be much further away than the bulls hope for.
That's exactly what a recent MIT report concluded: Large-scale commercial applications likely remain "far off." Morningstar's analysis puts early commercialization at five to 10 years away, while general-use quantum computing -- the kind that would justify multibillion-dollar valuations -- is likely 20 years out. That's a long time to fund operating losses at these burn rates, with no guarantee these companies survive long enough to see it.
Two smarter ways to play quantum
Alphabet (GOOG +0.85%) (GOOGL +0.90%) offers arguably the strongest quantum research program in the world. Its Willow chip achieved a major error-correction breakthrough, and the company has the resources to fund quantum R&D indefinitely.
NASDAQ: GOOGL
Key Data Points
With annual revenue topping $400 billion, Google Search still growing 17%, and Google Cloud surging 48% to a $70 billion-plus run rate, quantum computing is the cherry on top of an already dominant business.
International Business Machines (IBM 0.27%) also gives you a world-class quantum program with an R&D budget that dwarfs those of the pure plays. Meanwhile, while the company isn't as dominant as Alphabet, the core business still generated $67.5 billion in revenue last year, including a decade-high $14.7 billion in free cash flow.
NYSE: IBM
Key Data Points
With quantum commercialization still years away -- maybe decades -- the smartest approach is owning companies that can fund the research from profitable operations. Alphabet and IBM give you legitimate quantum exposure without the existential risk of pure plays trading at extreme valuations.
