IONQ - IonQ: Quantum Leap Of Faith Needs Profits To Build A Moat But It's Not Close

2023-09-11 16:00:00 ET

Summary

• IonQ stock has experienced a massive surge, driven by the hype surrounding quantum computing and its progress toward its milestones.
• Despite being unprofitable, IONQ has seen a significant increase, with buyers who purchased at its December low up over 550%.
• Investors need to consider whether IonQ's competitive advantages can be sustained as the technology evolves rapidly over the next few years.
• Short-sellers from IONQ's November 2021 highs are likely still holding on, betting that the company's profitability roadmap isn't anywhere near completion.
• While there isn't a sell signal on IONQ, I argue that waiting for a resolution over its $20 critical resistance zone before reassessing another buying opportunity could be wise. Patience is key.

IonQ Stock's Massive Surge

AI investors like a good story these days much more than profitability. The hype that drove OpenAI's ( MSFT ) ChatGPT into the spotlight at the end of 2022 has also extended to leading quantum computing systems specialist IonQ, Inc. ( IONQ ).

Management highlighted at its August earnings conference that it's starting to see "quantum's ChatGPT moment" taking shape, driving significant interest in its systems. Notably, the company assured investors of its progress toward hitting its AQ 64 milestone by 2025. Management indicated the recent agreement with Switzerland's Quantum Basel to build the EU quantum data center as a critical step in the correct direction. Accordingly, IonQ stressed that it "validates" the company's roadmap, providing investors with a clearer path toward its medium-term targets.

However, investors must note that IonQ is unprofitable and is not expected to hit adjusted EBITDA profitability through FY26. However, the surge in IONQ from its December 2022 lows likely suggests the market has attempted to price in the optimism and likely solid progress in its roadmap. Accordingly, IONQ buyers who bought at its December bottom are up more than 550% through its recent close. The massive upward re-rating has also inflated its valuation, as IONQ last traded at a forward revenue multiple of 157x. (EV/Revenue).

However, I believe IONQ Bulls would likely point out that the company isn't a "next-twelve-months" growth story, given the milestones it has telegraphed through 2025. Furthermore, management updated that the company is on track toward its $100M milestone in cumulative bookings from 2021, as it upgraded its FY23 bookings outlook to a range of between $49M and $56M, or a midpoint bookings guidance of $52.5M for FY23.

Therefore, I believe investors buying into its growth story now are likely reflecting significant optimism over its ability to scale and achieve its technical milestones over the next three to four years. However, investors must still question whether IonQ has a defensible competitive advantage moving ahead as the technology evolves rapidly.

Seeking Alpha Quant's valuation grade of "C-" suggests IONQ isn't aggressively priced for its growth prospects, assigned a "B-" growth grade by Quant. However, IonQ's "F" profitability grade (the worst possible) is a "sore" point in its Quant metrics, suggesting a need to remain cautious about its ability to generate a sustainable moat over time.

Furthermore, short-sellers are still convinced that the company might not fulfill its milestones despite IONQ's surge from last year's lows. Accordingly, the short interest as a percentage of float on IONQ remains relatively high at more than 15% as of mid-August . Therefore, I believe these bearish prognosticators are still hanging on from IONQ's November 2021 highs, as IONQ is still nearly 44% below those levels.

Is IONQ A Buy?

IONQ pulled back nearly 40% from its August highs through its mid-August lows. However, buyers returned quickly and aggressively, lifting its upside post-Q2 earnings as IONQ flew right back toward its $20 resistance zone.

While a breakthrough remains possible, I'm not a typical breakout investor and prefer to assess buying opportunities on pullbacks/dips. As such, even if I were to consider adding a speculative position in IONQ, I wouldn't be keen to do so at the current levels.

Furthermore, the steep pullback from its August highs suggests a rather aggressive rotation out of the stock. Therefore, awaiting more clarity over the recent re-test of the current levels could prove to be wise as we allow resolution over the $20 resistance to pan out before reassessing the follow-on buy levels. Patience is key.

Rating: Initiate Hold. Please note that a Hold rating is equivalent to a Neutral or Market Perform rating.

Important note: Investors are reminded to do their due diligence and not rely on the information provided as financial advice. Please always apply independent thinking and note that the rating is not intended to time a specific entry/exit at the point of writing unless otherwise specified.

We Want To Hear From You

Have constructive commentary to improve our thesis? Spotted a critical gap in our view? Saw something important that we didn't? Agree or disagree? Comment below with the aim of helping everyone in the community to learn better!

For further details see: