Investment thesis
Year-to-date, IonQ (NYSE:IONQ) stock is up more than 300% and the important question here is whether the stock has more potential to grow based on its financial results, developments, and market outlook of quantum computers and cloud computing or not. I don’t want to devote this article to explaining the market outlook of quantum computers and quantum computing by mentioning various reports that have projected exponential CAGR for quantum computing market size in the following years as there are already lots of articles on the subject. So, I think it is safe to accept that in the following years, the demand for quantum computers and quantum computing is going to become significantly stronger, and huge investments of Amazon, Microsoft, Google, Intel, and IBM on cloud platforms and quantum-computing-as-a-service (QCaaS), and producing quantum computers, support this insight. However, it is not safe to anchor an investment thesis on IONQ to the strong market outlook of quantum computers as the stock’s price has already skyrocketed for the sake of it.
Let me give you an example (You can skip this paragraph as it is just an example to show why it is not safe to invest in IONQ just based on the market outlook of quantum computers). About 30 years ago, reports were projecting a strong market outlook for smartphones. Various companies were researching to create smartphones, and in 1994, IBM launched the first smartphone for purchase. It was an analog cellular phone with email, calendar, and fax functions, and the touch-screen user interface included predictive text. For sure, there were analysts back then who were thinking that the future of smartphones as a consumer device belongs to IBM. Now, we know that it is not true. IBM rewarded its shareholders in the past three decades, however, not with producing and selling smartphones. My point is that at its current price, investing in IONQ solely due to the market outlook of quantum computing seems like investing in IBM based on its capabilities in making smartphones in 1990th.
As IONQ is still in the early stages of its commercial growth, it reports significant operating losses in its financial results. In the first half of 2023, the company reported a loss from operations of $61 million, compared to $37 million in 1H 2022, as the company more than doubled in research and development expenses. According to its current operating results, assuming no significant changes in R&D, sales and marketing, and general and administrative expenses, the company needs to increase its revenue by about 600% to cover its operating expenses. As the company’s ability to generate revenue is connected to further developments and commercialization of its quantum computers, its operating expenses in the following years are going to increase in a significant way. Thus, in reality, IONQ’s revenue generation ability must increase a lot more than 600%.
It is worth noting that the company itself admits that this is not going to happen soon. “We expect to continue to incur losses for the foreseeable future as we prioritize reaching the technical milestones necessary to achieve an increasingly higher number of stable qubits and higher levels of fidelity than presently exists,” IONQ declared in its 2022 annual report.
Also, there are big and small competitors out there that are working on producing quantum computers through different approaches, and IONQ’s trapped ion approach to building quantum computers has not proved to be the best approach (it has its own pros and cons). For example, Google (GOOG), IBM (IBM), and Rigetti Computing (RGTI) are adopting a superconducting circuit technology approach, and PsiQuantum and Xanadu are pursuing a photonic qubits approach. Alongside IONQ, Quantinuum, owned by Honeywell International (HON), and Alpine Quantum Technologies are using a trapped ion quantum computing approach (however there are differences in processor architecture, system design and implementation, and strategies to scale).
IONQ sells access to several quantum computers to some customers via its own cloud service. However, it generates most of its revenue through third parties. IONQ is currently selling access to several quantum computers of various qubit capacities via Amazon Web Services’ (AWS) Amazon Braket, Microsoft’s Azure Quantum, and Google’s Cloud Marketplace. It means that the company’s business is dependent upon its relationship with its cloud providers, and you cannot be sure that IONQ can sell its quantum computers in the future to Amazon, Microsoft, or Google as these companies are trying to build quantum computers internally, imposing great risks to IONQ’s efforts and technology.
The good thing about IONQ is that the company has funded the major part of its development through equity financing, and is not exposed to serious debt risks. As of 30 June 2023, IONQ had a debt-to-equity ratio of 10%, meaning that the company is not heavily reliant on borrowed funds. Also, it is worth noting that as of 30 June 2023, IONQ didn’t have any financing lease agreements. As of 30 June 2023, IONQ had $362 million of total short-term investments, compared to $54 million of total liabilities. Overall, the company has a reliable balance sheet; however, to keep up with other small and big companies that are trying to build quantum computers, IONQ might start debt financing, and become more reliant on creditors.
From my perspective, there is one scenario that can change everything for IONQ: receiving an acquisition proposal from a big company (i.e., Google, Microsoft, Amazon, IBM, etc.), which relies on the company’s R&D achievements that can bring a broad quantum advantage against the quantum computers built by its competitors. However, to date, there are no signs of any acquisition proposal.
One might argue that IONQ has already made huge steps. I’m not ignoring IONQ’s current achievements in the world of quantum computers; however, the company’s stock price has already increased enough to represent the existing achievements. Recently, IONQ announced a $25.5 million deal with the United States Air Force Research Lab to deploy two barium-based trapped ion quantum computing systems for quantum networking research and application development. Also, on 27 September 2023, the company unveiled two new systems (IonQ Forte Enterprise and IonQ Tempo) that give the possibility to businesses to harness the power of quantum directly from their own data centers. These are good news for the company; however, not good enough to make investors pile on the stock.
IonQ has a market cap to assets ratio of 5.34x, compared to Rigetti Computing’s market cap to assets ratio of 1.17x, Honeywell’s market cap to assets ratio of 1.97x, and D-Wave Quantum’s (QBTS) market cap to assets ratio of 5.64x. Thus, investors are already valuing IonQ’s intellectual property and its potential to commercialize its quantum computers (if built enough and efficient to scale) more than its competitors. Thus, I see no strong reason to say that the stock has significant potential to increase further fundamentally.
End note
The market outlook for quantum computers and quantum computing is strong. Also, IONQ has a solid balance sheet and is not exposed to serious debt risks. However, there is no assurance that IonQ can have a significant market share (relative to its current market cap, assets, and patents) in the quantum computing market in the following years, as there are different small and big competitors out there, and despite its developments and achievements, IonQ still is not in the position to cover its operating expenses. At its current stock price, IONQ is a hold.
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