Investors are keen on quantum computing stocks like IonQ(NYSE: IONQ) right now. The stock is up a whopping 294% in the past year, likely due to industry breakthroughs in quantum computer chips that are helping improve error correction and computational speeds. With a market cap of $8.6 billion as of this writing, IonQ is the largest pure play quantum computing stock on the market and has been a favorite of investors in the last few quarters.
It can't be because of the company's underlying financial performance, which remains ugly. IonQ is generating minimal sales and racking up huge losses quarter after quarter. Here's my prediction for what comes next for IonQ shareholders.
Building quantum computers?
IonQ aims to build quantum computers to sell to third parties. The promise of quantum computers is large. Using quantum mechanics, researchers have been able to build quantum bits -- Qubits -- that can compute difficult problems exponentially faster than traditional computers. If quantum computers can be widely commercialized, it promises a revolution in computing similar to that of traditional computers. IonQ has an early stage quantum computer that it sells to research institutions and through the cloud computing platforms.
The problem with quantum computers is how error-prone the process is. Researchers have struggled to reduce errors in quantum processing, which is why there is still little adoption outside of scientific research departments. Alphabet claimed last year that it built a new quantum computer chip that reduced errors the more it scaled up, solving a huge problem for the industry and creating hype around AI stocks like IonQ. It's still not ready for commercialization, though.
Limited capabilities and expensive start-up costs are why IonQ's quantum technologies are still rarely used in primetime such as the public cloud platforms. However, if these technical issues are solved and quantum computers become common in the cloud and super computers, IonQ should make a lot of money -- that is, if it is the first research team to win the race. There are dozens of research teams around the world trying to crack quantum computing, some with much larger budgets funded by huge technology companies like Alphabet.
Image source: Getty Images.
Little revenue, large losses
We cannot look at a stock without considering its financial health. IonQ is in a tricky place as a company that's essentially in the pre-revenue phase. All research and no sales make IonQ a dull stock.
Last quarter, the company generated just $7.6 million in revenue, and it generated $43 million over the last 12 months. Its operating loss was $255 million in the last 12 months, a figure that has gotten consistently worse over the last few years.
IonQ management has padded the balance sheet by raising money through an at-the-market (ATM) offering, bringing the cash pile to around $700 million at quarter-end. This still hurts existing shareholders through share dilution and does not solve the problems looming on its income statement. In order to research quantum computers, IonQ spent $40 million on research and $23.8 million on general overhead costs last quarter.
The company needs to rapidly scale up its revenue in order to cover these costs. But it cannot do so unless there are more breakthroughs in quantum computing research. We have no idea how long it will take for the industry to make these developments, if they are ever accomplished. Quantum computing is a complicated technology, and there are no guarantees that it will ever be commercially viable.
Betting on scientific breakthroughs is a difficult way to invest. This is especially true when the stock you are buying has a market cap in the billions and minimal revenue.
With a long timeline before quantum commercialization, the next few years for IonQ will look more like the past: Huge operating losses, big cash burn, and shareholder dilution. Perhaps revenue will grow, but it's going to take a long while before IonQ is generating meaningful sales compared to a market cap of $8.6 billion -- a market cap that will rise given shareholder dilution, regardless of whether the share price stays the same.
IonQ looks like a stock with limited upside and major downside potential, which is exactly the opposite of what you want in your portfolio. IonQ stock is up almost 300% in the last 12 months, but I predict that the next few years should be painful for shareholders who buy today.
Should you invest $1,000 in IonQ right now?
Before you buy stock in IonQ, consider this:
The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now… and IonQ wasn’t one of them. The 10 stocks that made the cut could produce monster returns in the coming years.
Consider whenNetflixmade this list on December 17, 2004... if you invested $1,000 at the time of our recommendation,you’d have $642,582!* Or when Nvidiamade this list on April 15, 2005... if you invested $1,000 at the time of our recommendation,you’d have $829,879!*
Now, it’s worth notingStock Advisor’s total average return is975% — a market-crushing outperformance compared to172%for the S&P 500. Don’t miss out on the latest top 10 list, available when you joinStock Advisor.
Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Brett Schafer has positions in Alphabet. The Motley Fool has positions in and recommends Alphabet. The Motley Fool has a disclosure policy.
