IONQ - IonQ: Business Ahead Of Development Timeline Reiterate Long

2023-07-07 02:51:27 ET

Summary

• IonQ has achieved 29 algorithmic qubits on its Forte system ahead of schedule and announced its first system sales agreement with QuantumBasel of Switzerland.
• The agreement with QuantumBasel will establish a quantum data center and involves the sale of two future quantum computing systems, boosting IONQ's 2023 bookings by 25%.
• IonQ's Forte QC is now accessible via major cloud providers, and the company ended 1Q23 with over $300 million in cash and cash equivalents, indicating strong financial health.

Summary

IonQ ( IONQ ) is conducting research and development of technologies for quantum computers with increasing levels of computational capabilities. The company also offers customers access to a quantum computer with 11 qubits. IonQ now provides its quantum computing services to a limited customer base through its own cloud service in addition to Amazon Web Services, Microsoft Azure, and Google Cloud Marketplace. Due to the company's consistent success and steady development, I am reiterating my earlier recommendation to buy the stock where I believed the company's innovative usage of trapped ions sets it apart from the competition and demonstrates its commitment to developing state-of-the-art scientific solutions for tackling society's most serious concerns.

Fast forward today, IONQ has continued to achieve its goals, enter into new partnerships, and raise its guidance for FY23. On the technology front, IONQ has completed construction of the second Aria QC and announced that it has achieved 29 algorithmic qubits (#AQ) on its Forte system seven months ahead of the technical roadmap. This QC will be added to the public cloud offering in 2Q23. Good news, as this system will boost redundancy, expedite the processing of orders, and decrease downtimes. Finally, IONQ has also announced its first system sales agreement, which I see as a strong stamp of acknowledgement by the market. All of this keeps me optimistic about the company's future and stock (it's risen about 1.7 times since I covered it). I still see potential in this stock based on my valuation model.

First system sales agreement

The most promising development is IONQ's first system sales agreement with QuantumBasel of Switzerland, which, in my opinion, shows optimism about the company's planned technological direction. In order to better serve customers in Europe, the Middle East, and Africa, the two companies have decided to establish a quantum data center at the uptownBasel innovation campus. For a grand total of $28 million, IONQ will supply two quantum computing systems of the future, designated #AQ 35 and #AQ 64. Each party will be responsible for 50% of the management of both systems. While A35 is not yet available, I am confident that IONQ will be able to meet the deadline given that they were able to complete AQ29 months ahead of schedule (the original deadline for which was FYE23). Given IONQ's track record of meeting or beating its deadlines, I anticipate that both #AQ35 and #AQ64 will be completed and made available earlier than expected..

This agreement is also significant because of the confidence it has inspired in the company's technological development thanks to the implied due diligence performed by QuantumBasel (to be honest, investors have almost no way to validate management's word so far). I believe that QuantumBasel was involved in negotiations for IONQ prior to the conclusion of this sales agreement, giving them unique insight into the evolution of IONQ's system. Accordingly, I think this contract shows a lot of faith in IonQ's QC technology and the company's ability to deliver on its road map on time or even early.

The deal resulted in a 25% increase in IONQ 2023 Bookings, to $50 million, and an increase in FY23 Bookings guidance from $45 million to $55 million.

Other positives

IONQ's Forte QC is now officially accessible via major cloud providers, which is exciting news in addition to the big announcements concerning the system sales. Early positive results from algorithms developed by Airbus, Hyundai, and Los Alamos National Laboratory on Forte demonstrate the efficacy of the IONQ product.

Even though IONQ is still in the research and development phase, it is promising to see the company finish 1Q23 with more than $300 million in cash and cash equivalents. IonQ has the financial wherewithal to confidently invest in and run its business, as its current burn rate is around $100 million per year (EBITDA x 4). This is based on 1Q23 results.

Valuation

I continue to believe the current valuation does not reflect IONQ's potential value. Given that IONQ has not generated any meaningful revenues and the industry is so new, I used management's long-term guidance as a yardstick to how much IONQ could be worth.

I expect IONQ to make $522 million in sales in FY26, giving it a market cap range of $2 billion to $4.5 billion and a stock price range of $9.89 to 23.01 in FY25. Since the stock price has risen from $4 to $13 today, the upside is lower but still attractive.

Assumptions:

1. Sales will meet management's projections in FY26
2. IONQ to trade within a range of 3x to 8x forward revenue multiple. As there are no direct comparable, I used AMD and NVDA revenue multiple to benchmark.

Conclusion

IONQ recent achievements, including the completion of the Aria QC and the first system sales agreement, highlight the company's technological progress and market confidence. The sales agreement with QuantumBasel not only indicates trust in IonQ's quantum computing technology but also signifies the company's ability to meet or exceed deadlines. Additionally, IonQ's accessibility via major cloud providers and positive algorithm results further demonstrate its efficacy. I believe IonQ has the potential for significant future growth. Considering the stock's recent rise and the industry's newness, there is still attractive upside for investors.

For further details see: