Quantum Computing Stocks. Meet AI Hype.
Table of contents
“If you think AI is hot, wait until it meets quantum computing.” That was the title of a recent Forbes piece by a Comms person at SAP trying to elbow her company’s quantum-computing-cum-generative-AI reputation to the front of the line. The article continues with a quote from a thought leader at (wait for it) SAP who states, “continuing advances in quantum hardware, middleware, and software will lead to a general-purpose quantum advantage machine being developed by 2030.” So, still at least five years away from a commercially viable quantum computer? Alrighty then.
While dozens of companies across the globe work on various aspects of quantum computing, retail investors are left hoping that one of the three quantum computing stocks on offer (all here as a result of SPACs) will emerge as a winner-takes-all leader. How can we tell a leader is emerging? There are several potential outcomes:
- The leader(s) are private companies whose advancements aren’t made known since they’re not publicly traded. Their client list is confidential, and outsiders haven’t a clue they’ve pulled out ahead. One expert we interviewed believes the leader will keep their progress under wraps.
- The leader(s) are giant tech firms that have thrown billions at the problem for decades – names like Google, Microsoft, and Intel which are all dabbling in quantum computing. Google declared quantum supremacy in 2019, so game over, right?
- The leader is a publicly traded pure-play company that’s dedicated to quantum computing. The key indicator here is revenues. If even the experts can’t agree on what quantum supremacy, the only indication you’ve built something great is people throwing money at you to use it.
In every case, revenues are the clearest indicator that any quantum computing company has built something others find value in. This brings us to AI, which may be in the limelight now, but is something thought leaders have been thinking about for a while. Just over six years ago, our piece on Artificial Intelligence (AI) and Quantum Computing talked about how quantum computing hardware might allow us to advance AI. Today, the situation seems reversed. If generative AI algorithms have already mastered protein folding – something quantum computers were expected to accomplish – then perhaps we can use them to accelerate the arrival of quantum computing. “But quantum computers are already here!” you might exclaim, pointing to the availability of D-Wave’s $10 million computer six years ago. That’s a good segue into what D-Wave (QBTS) has been up to.
D-Wave Makes a Small Splash
A $10 million quantum computer may be a big sell, so why not just offer quantum-computing-as-a–service (QCaaS)? That’s the direction D-Wave is taking, though we’d expect customers spend more as time goes on, not less. Services aren’t easily scalable, so our focus is mainly on QCaaS revenues which are declining over time along with total revenues.
In an attempt to increase their share price to avoid being delisted, D-Wave has engaged an “investor awareness and recognition” firm which issues fluff press releases about how D-Wave “stands ready to execute on U.S. governments shift to quantum computing.” Standing ready and five bucks might get you a cup of coffee at Starbucks. We were unaware that firms could pay their way into getting exposure on platforms such as Seeking Alpha, Business Insider, or directly target all those gullible newbie investors on Robin-the-hood who might have some capital left after hedge funds like Citadel get done fleecing them.
So, if you come across articles talking about how D-Wave is on the cusp of quantum computing generative AI greatness, what should you do? That’s right little Johnny, you ignore them. Always look at revenue growth as a key indicator of whether a company has built something their clients will pay money to access. Not only is D-Wave well below our market cap cutoff of $1 billion, but they haven’t managed to achieve meaningful revenues ($10 million or more in a single year) which is a testament to how valuable (or not) clients find their QCaaS offering. For the FOMO lot throwing caution to the wind, a simple valuation ratio (SVR) of 40 shows that QBTS shares are extremely rich – right up there alongside the likes of NVIDIA (NVDA). But that’s nothing compared to how rich our next company is.
IonQ Gets Pumped
IonQ (IONQ) doesn’t have any problems meeting our market cap cutoff as it approaches the $3 billion mark. It’s the same hype we talked about earlier this year in our video on IONQ Stock Update | A Hype Problem. Like that video, this article will attract cheerleaders who mindlessly ram the company’s value proposition down your throat while completely ignoring the ludicrous valuation – an SVR of 161. To put that into perspective, IONQ shares would need to trade at $3.42 before they’d share the same valuation as D-Wave, and $1.71 to share the same valuation as Snowflake (SNOW). Last quarter, IONQ had annualized revenues of about $17 million, and that’s before you back out related party revenues (about 23% of total revenues last quarter). Cheerleaders wait with bated breath for every fluffy press release the company issues, while the ground truth is always revenues.
The above press release about how “IonQ Raises 2023 Bookings” says that following this announcement “the Company is not increasing its expectations for 2023 recognized revenue.” If bookings are such a great sign of progress, then why not? Always focus on revenues, not bookings. And no, bookings are not revenues, no matter how much cheerleaders want to try and convince people that’s the case. Take an accounting class if you’re confused about the difference between the two.
Were IONQ valued at an SVR of 20 (a valuation where we might consider buying shares), that would equate to a market cap of $342 million or a share price of $1.71. Since we only invest in companies with a market cap greater than $1 billion, they’d need to have annualized revenues of $50 million before we’d consider an investment in the company. According to their glossy SPAC deck, investors can expect to clear that number next year when the company hits $60 million in revenues. Then, you read the fine print and realize that “revenue may include prepayments, bookings, and recognized contracts,” and quickly realize that whoever put that SPAC deck together needs to take an accounting class too. There is absolutely nothing to merit the absurd valuation of this company except for hype, and a cursory search over at Twitter for $IONQ shows there’s no shortage of that. That brings us to the last quantum computing stock on our list – Rigetti Computing (RGTI).
Don’t Forget Rigetti
Just over a year ago, we wrote about Rigetti Computing Stock: A Risky Bet on Quantum Computing. In that piece, we expressed concerns about how they haven’t achieved meaningful revenues yet – what we define as $10 million in calendar year. According to their SPAC deck, that number should have been cleared last year with $18 million in forecasted revenues. The reality? About half of that, and the first quarter of this year isn’t off to a good start with just $2.2 million in revenues. Perhaps there’s some element of seasonality here, as Q4-2022 saw revenues clear $6 million? To reconcile the variability, we can use the average quarterly revenues over the last trailing twelve months to calculate simple valuation ratio which comes in at a “modest” 16. Seasonality also results from customer concentration risk, and last quarter a single customer accounted for more than half their revenues (three customers accounted for 92% of total revenues).
This customer concentration risk means we wouldn’t consider an investment in Rigetti even if it wasn’t well below our market cap threshold.
Conclusion
The interactions between quantum computing and artificial intelligence don’t matter much unless they translate into revenue growth. The rich valuation of quantum computing stocks shows that some of that AI hype is spilling over, and anyone looking for exposure here needs to remember the importance of investing in companies, not stocks. Because when all the dust settles, that’s what you’re going to be left with. As for those thinking there’s an easy short here, the irrationality of the herd will always outlast your margin limits. When you see spectacular levels of hype, it’s always best to walk away and check back a year from now, which is precisely what we’re going to do.
Share
What a Pathetic looser are you?
You your self hold 2000 IONQ shares and you write this??
Why do you want to buy more of IONQ??
You can fool the people no more
Ladies and gentleman. These are the sorts of tools pumping this stock.
Don’t you love when your point gets made for you? Newbie here and just want to thank you for all your excellent work. Cheers!
You are quite welcome, and we’re glad to have you around!
Good article.
I appreciate real research! Thank you.
Hey Joe, I was wondering, was it the same VC that took IONQ public Via the SPAC Process, that also took Planet Labs public?I think it was, but I might be wrong.
I’m just a bit concerned because I saw a news bulletin on TD Ameritrade about Lawsuits regarding SPAC’s Including Planet labs.
I don’t have a position in IONQ, and won’t buy any of there stock at this time largely because of the Red flags you’ve exposed in your research articles thank you.
However, I’m a little concerned about Planet labs, and it’s new board member Nikola, Dimassi.
I have a sizable position in planet labs, and I hope there isn’t a problem with the SPAC process that brought the company public.
If You, and your team could shine some light on this I would greatly appreciate it. Thanks!
Billy E.
I got the board members name wrong. His name is Niccolo De Masi.
Hey Billy,
Lawsuits seem to be running rampant across many SPACs, and it’s tough to tell what’s substance vs standard ambulance chasing. Planet Labs is one of our holdings, so we’ll check in with them once per year (or if something meaningful happens). The last time we updated paying subscribers, shares had dumped and we added some. We didn’t see any major red flags, but we’ll keep this in mind for the next Planet Labs check in. Thank you for the heads up!
Thanks Joe, I’m not sure that any of my concerns are warranted. That said, when I discovered that the same VC was involved in the SPAC process of both firms, and is sitting on the board of Directors of both IONQ, and PL I became curious, and a bit concerned.
I like the management team @ Planet, and I also bought more shares when Planets stock price went down.
Billy E.
Once again, Nanalyze analysis helps keep me out of trouble! A few years ago, I’d have been tempted to invest in companies like these.
It’s very tempting to see hype and feel like one is missing out. Instead, it’s important to recognize hype for what it is and steer clear of it. If you’re invested in a firm that undergoes hype, then you have some difficult market timing decisions to make 🙂
More details
Pay us money 😉
conditions?
We need some context here
This is the second article I’ve read and again bravo on how well this is written making it so easy to understand. I’m hooked. 🙂 I see there are terms I don’t understand due to being new here. I’m looking forward to learning the language cause I’m down with the sickness.
That’s great to hear Frank. QC is one of the more exciting and interesting technologies we cover. If you liked this piece, check out the interview we did with 1QBit a while back that has a lot of good info: https://www.nanalyze.com/2019/04/quantum-computing-software/