IONQ - IonQ: Short Opportunity Is Back
2023-06-06 11:47:12 ET
Summary
- IONQ's share price has doubled recently, but the current market capitalization may not be justified due to several risks, including commercial viability, share dilution, and accusations from a short report.
- Quantum computing is a promising field, and IONQ's CEO predicts a ChatGPT moment for the industry within the next few years, but the company faces competition from financially stronger corporations.
- Despite the potential as an early mover in the quantum computing industry, the $1.5B enterprise value may be unjustified due to several risks. For me, it's an opportunity to short.
Investment Thesis
After almost a year of sideways movement, the IonQ (IONQ) share has nearly doubled quickly. On the one hand, this was related to statements in the Q1 results, but on the other hand, also to the general AI hype lately. Overall, however, the current market capitalization is not justified in my view, given several risks: actual commercial viability is still only a goal for the future; until then, the company continues to burn money, continues to issue new shares, has higher stock-based compensation than revenues, and there are still all the accusations of a short report from last year, which was answered by the company only by a brief statement. In view of all these risks, I see little upside and more downside potential, especially for the near future.
A quantum computing "ChatGPT moment"?
Quantum computing is undeniably a promising field that has attracted vast amounts of venture capital, government funding, and R&D investments from large companies. Government funding for quantum computing research is substantial; for example, China has allocated $15 billion for investment in this area, the European Union $7.2 billion, and the U.S. $1.3 billion. This interest has led to a growing number of startups and research papers in the sector, showcasing the significant potential in the industry. Presently, quantum computing remains nascent, with real-world applications just starting to emerge. However, IONQ CEO Peter Chapman predicts that a ChatGPT moment for the quantum computing scene will come as early as the next few years.
Often I hear various individuals from academia and industry opine on when quantum will take off. At a recent industry conference, this question was asked to various panelists, with answers ranging from this year to 20 years or more. It reminds me of the artificial general intelligence market prior to ChatGPT, also with a divergence of viewpoints from so-called experts. Next time you hear a company executive say, "I think quantum will take off in X years …" you need to mentally append "... for our company's technology." The world is starting to come to grips with the implications of ChatGPT, with most caught off guard and with some facing an existential threat to their business. Within approximately the next two years, we expect that quantum will have its own ChatGPT-like moment, with QML in 2024, and line of sight for IonQ's broader adoption with an #AQ of 64 in 2025. My prediction is that no matter how much we say it and deliver on our technology roadmap, both investors and customers will be taken by surprise.
Financial Progress & Valuation
First, a short overview over a longer period for revenues, expenses, and net income.
The company is currently valued at an enterprise value of $1.47B. The market cap is $1.85B, and according to the company, "Cash, cash equivalents and investments were $525.5 million as of March 31, 2023." Over the last 12 months, the net loss has been approximately $71M. In the last quarter, the net loss was $27.3M. Overall, costs are increasing faster than revenues, as seen in the growing operating loss.
In the past year, the company has benefited from rising interest rates and now reports income from interest and "other non-operating income"; what exactly this means is not clear from the income statement.
All in all, the company has made a net loss of about $175M in the last two years, so it can be assumed that the currently available cash reserves will not be sufficient until eventually significant sales or even profitability is achieved, which is uncertain anyway whether this will ever happen.
Already in the past, there has been a slow but steady share dilution (see below), and I expect this to continue in the future. This means that the shareholder is making a very uncertain bet on a technology that theoretically has much potential but is still far from mature. Moreover, as stated in previous articles , the company must compete with financially stronger corporations. If this uncertain bet pays off at some point, the shareholder will be rewarded with rising share prices. Until then, he pays in the form of share dilution and stock-based compensation for the research and the resulting loss.
Outlook
But I don't want to badmouth everything about this company because it also seems to be progressing in its technology. However, I think it is still too early for an investment, and you can wait at least six more months for further developments. In the event of the company's success, you would not capture all the share price gains but at least have significantly less downside risk.
In the Q1 2023 figures, the company announced it reached 29 algorithmic qubits seven months earlier than planned and considers this an essential step toward commercial use. According to the company, with 35 AQ, classical computers are finally surpassed, and new commercial use cases open up.
The 25 algorithmic qubits milestone is one more step towards "quantum advantage," the point at which quantum computers will exceed the capabilities of their classical computing counterparts and are likely to propagate broader commercial use cases. We are confident we will hit an #AQ of 29 in 2023, putting us in clear striking range for #AQ 35 in 2024. The #AQ milestone of 35 is particularly significant because reaching it means that classical hardware will no longer be able to fully simulate our quantum hardware at commercial scale. And more importantly, we expect that at #AQ 35, the commercial value of the first quantum machine learning (QML) applications will crystallize, driving adoption of IonQ's industry-leading quantum computers.
IONQ annual report
The Short Report
Will there be a ChatGPT moment for the company? Maybe. Fact is, we private investors always have too little information and no insider information to judge that. The CEO may be right and wrong at the same time, and the ChatGPT moment will happen, but not triggered from IONQ, but from another company.
Furthermore, there is a very detailed 180 pages short report from Scorpion Capital, published on May 3, 2022, where all kinds of accusations are raised. One point I want to mention is the claim that sales do not exist but are artificially generated by moving money back and forth and insider deals. Because that's one point I've criticized about the company in the past: It reports revenues and bookings, but investors have no insight into exactly where these revenues come from: which customer and which benefits these customers have.
Despite purportedly having the world's most powerful quantum computer, IonQ has disclosed a pitifully small list of "customers" and partners in its press releases and materials. We spoke with a significant percentage of those mentioned, and they each laughed at, mocked, or trashed IonQ's capabilities - contradicting their quotes in IonQ's releases: the machine "isn't really real"; "way too much instability"; "not really useful"; "run times are really slow"; and users are "definitely" unhappy. "Customers" were evasive or laughed when we asked if they pay for access to the computer.
On May 12, 2022, there was a response posted by the two founders of IONQ to the short report. However, it is not an attempt to answer or refute all the arguments of the short report, but only the statement that the short report is poorly researched and untrue. After all, the short report is 180 pages long, and the answer is one page long. Another accusation is that CEO Peter Chapman claimed to have "thousands of customers" as early as 2021, according to an earnings call. This seems very strange considering the barely existing sales, especially in 2021.
Hi, Katy, thanks for calling in, and excellent questions. What we have seen to date is that we've seen thousands of customers running projects on our machines with billions of shots in terms of running their quantum computations.
Share dilution, insider trades & SBCs
For me, these three things are standard checks I make in every article, as excessive stock dilution and stock-based compensation can put us, shareholders, at a disadvantage. Not much happened in insider trades, small sales in the last six months. However, we can see that the SBCs are higher than the company's total revenue, and there is also a significant share dilution.
openinsider.com
Conclusion
The company can potentially be one of the early movers in a possible future industry. However, there is too much uncertainty for my taste because there are several risks simultaneously. On the one hand, many private companies and state-funded universities are researching quantum computers at this very moment, and who will emerge as the leader in several years is pure guesswork for private investors. On the other hand, another risk is that there is truth in the short report, which is also a guessing game for us: did the authors of the short report really talk to the previous customers and partners of IONQ? These things are difficult to judge. In any case, the short report seems argumentatively better than the brief answer on the part of the company.
But even if it is complete nonsense, there are still other risks and general negative aspects for shareholders, such as increasing outstanding shares. Given all these risks, uncertainties, and almost non-existent revenues, I believe the $1.5B enterprise value is unjustified. For me, it's a short position.
Understand the risk of shorting
It is important to understand that as a short seller, you have potentially unlimited risk of loss. In addition, you pay a fee for borrowing the shares. Exactly how much varies from company to company and also changes over time. This should be checked before a short sale is made. The borrowing fee at Interactive Brokers (what I use) is currently 0.85% per year.
I like to work with stops, especially when it comes to volatile stocks like this one; also to not lose potential temporary gains again. This way, I have made money shorting this company even though the stock has risen since I published my first article. Typically, I set a trailing stop loss at around 20%. So, if I short-sell at $10 and the stock rises to $12, I would get stopped out. However, if the stock falls to $8, the stop loss would trail, and I would get stopped out at $9.6 in that case. This is my personal preference, but everyone should decide for themselves.
And one more word to all who are long: good luck to you, and consider this article as a summary of the uncertainties because obviously, this is a high-risk position with a lot of upside but also a lot of downside potential. Maybe I am too pessimistic for such stocks; I believe things only when they are real and not when they are only in the stage of promise.
For further details see:
IonQ: Short Opportunity Is Back