IONQ - IonQ Isn't Worth The Risk

2023-09-12 01:01:42 ET

Summary

• IonQ's revenue has grown from $2 million to $16.4 million in the last year, with forecasts predicting $19 million in 2023 and potentially $87 million by 2025.
• The company is still far from profitability, reporting a net loss of $113.7 million and negative free cash flow and adjusted EBITDA.
• IONQ faces fierce competition in the quantum computing industry from companies like IBM, Intel, Microsoft, and Google, and will need to generate a marketable, profitable product to succeed.

Before delving into IonQ's (IONQ) prospects, it's crucial to understand quantum computing. Unlike classical computers that deal with binary bits (0s and 1s), quantum computers utilize quantum bits or qubits. These qubits harness the peculiar properties of quantum mechanics, creating complex, multidimensional computational spaces. This substantial computing power has the potential to revolutionize fields from medicine to materials science and data analysis.

Just like classical computers have logic gates (AND, OR, NOT, etc.) to perform operations on bits, quantum computers have quantum gates to perform operations on qubits. When these gates are strung together, they form quantum circuits.

For certain problems, quantum computers can achieve a speedup over classical computers. One famous example is Shor's algorithm, which can factor large numbers exponentially faster than the best-known classical algorithms. This has implications for cryptography, as many encryption systems rely on the difficulty of factoring large numbers.

One of the biggest challenges in quantum computing is that qubits are very sensitive to their environments. Even minor disturbances can cause qubits to lose their quantum properties, a phenomenon called decoherence. This makes error correction crucial, and it's a major field of research. In other words, even if a company is able to develop one quantum computer, developing several at scale, at a cost and level of reliability that is necessary, is immensely tough.

Revenue and Growth

In terms of financial performance, IonQ has been growing, albeit from a low base. Revenue jumped from a mere $2 million in 2021 to $16.4 million over the last twelve months. Forecasts indicate revenue could reach $19 million for the full year of 2023 with some estimating $87 million by 2025.

This needs to be framed within the company's sky-high valuation. The enterprise value, which currently stands at $3.6 billion, is approximately 219 times its trailing twelve month revenue. As a result, the stock is priced with a lot of growth already baked in.

Just today, shares were up another 10% supposedly on news of an agreement with Zapata AI. And last week, IonQ raised its revenue forecast to be between $18.9M and $19.3M, up from a prior estimate of $18.8M to $19.2M. Again, in the context of a $3.6 billion enterprise value, these are trivial amounts and do not indicate anything material about IonQ's quantum prospects. After all, this is a company that repeatedly states in its financial filings that is has never produced a scalable quantum computer.

Profitability

The company is still far from profitable. Over the trailing twelve months, it reported a net loss of $113.7 million. Free cash flow stands at negative $67 million with negative EBITDA to the tune of $103 million.

Expenses & Competition

The lion's share of IONQ's expenses goes to Research and Development (R&D), a whopping $53 million, representing 393% of its revenue. While high R&D costs are typical for companies in emerging technologies, it underscores how early-stage this company is and how far it may have to go to generate a marketable, profitable product.

While quantum computing is a nascent field, IONQ is not alone. It faces fierce competition from heavyweights like [[IBM]], Intel (INTC), Microsoft (MSFT), and Google (Alphabet (GOOG) (GOOGL)). Different companies are attacking the problem with various methods. For example, while Google and IBM are experimenting with superconducting qubits, IONQ is focusing on trapped ions, and QuEra is using laser pulses.

Market Potential

Public reports suggest that the total addressable market for quantum computing could reach $65 billion by 2030. The technology has the potential to significantly impact fields like chemistry, pharmaceuticals, cybersecurity, AI, financial services, marketing and many more.

The profound impact that quantum computing could have across almost any sector is not up for debate. There will certainly be areas where quantum computing is not necessary but the broader impact has a huge range of potential outcomes. The reality is that no-one can realistically estimate the market potential yet of quantum computing. Just like no-one can estimate the market potential for IonQ stock. It is largely a binary-type outcome that is dependent on many complex parts.

Liquidity and Cash Position

On a positive note, IonQ appears to be in a stable cash position, boasting more than $500 million in cash and cash equivalents, short-term and long-term investments, and importantly, no long-term debt. This liquidity should give it some runway to continue its R&D activities without immediate worries of running out of funds.

LK-99 Hype

Price action and investor interest in IonQ seemed to take off around the same time that rumors started to spread about the superconductor LK-99, since its discovery could potentially accelerate the development of quantum computers. In that sense, it's somewhat surprising that IonQ has not given up those gains after numerous scientists displayed skepticism over the findings.

It could be that investors have still not given up on the slim chance of LK-99 being proven true. Indeed, an article out today in Inquirer.net claims that Korean Professor Young-Wan Kwon, still stands behind his research and is ready to publish a more complete version of his findings. Hope around LK-99 could be what is keeping the stock elevated at these levels. Unfortunately, hope is not, and has never been, a reliable investing strategy.

Predictability and Earnings

Famous value investor Joel Greenblatt is known for saying if you cannot model normalised earnings 2-3 years out, simply skip the stock. In a similar vein, Warren Buffett puts a strong emphasis on consistency, typically seeking a steady earnings history of at least 10 years. Even Peter Lynch speaks of the need to invest in what you know and to wait until a company has compelling earnings. What these legendary investors have in common is the need for predictability and earnings. Unfortunately, in the case of IonQ we have neither.

The company hasn't yet produced a scalable quantum computer. Achieving what the industry calls "Quantum Advantage," the point where quantum computing overtakes classical computing in practical applications, still seems distant for IonQ. The mere fact that investors have put their focus on the Quantum Advantage and the race to a certain number of qubits (supposedly 50) seems like a red flag. It speaks of a gross simplification that is likely to blow up in an investor's face.

In reality, attaining a certain threshold of qubits will have little bearing on whether IonQ ends up as a well-managed, highly profitable enterprise in years to come. Given the complexities of quantum computing and the level of competition in the field, it likely has little bearing on whether IonQ can even be successful in the production of scalable quantum computers.

Conclusion

IonQ has grabbed the attention of certain investors. But as of now, IonQ seems less like a business and more like an ambitious science project fueled by public market speculation. Investors should tread carefully, as it is a highly risky venture comparable to early-stage biotech firms. Given the lack of clarity on its path to profitability, the high uncertainty surrounding the technology and the intense competition it faces, IonQ is a stock that should be avoided by everyone except those with the required field experience.

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