IONQ: massive appraisal and competition is great technology

mviamonte/iStock via Getty Images

investment thesis

while IonQ (New York Stock Exchange: IONQ) is an exciting company in the next generation industry, I believe the company will struggle to keep up with the rapid pace of technological change. The company competes with the companies More financial resources needed to pay the best talent. The company is losing money and that won’t change soon. There will be a need for continued refinancing or dilution. It is also unclear how much value IONQ has added to its customers. Information is difficult to find and even more difficult to understand the technology behind quantum computing. Much of any potential future success is already appreciated in its massive rating. In addition, the cost of talent and energy is rising, and investment capital is becoming scarcer as interest rates rise. Therefore, I don’t see an attractive risk/reward ratio.

About IonQ

IonQ was founded in 2015 by Dr. Christopher Munro and Dr. Jung-sang Kim, who already have decades of experience researching quantum computers. They had “the goal of getting trapped ionic computing out of the lab to market” (source).

At the moment, it is the only public company that has quantum computers available in large technology clouds — via Microsoft Web Services (MSFT) Azure and Amazon (AMZN) starting in 2019, and Google Cloud (GOOG) starting in 2021. These can be booked by companies, which generates revenue for the company. The company has been listed on the stock exchange since October 2021.

Future outlook of the quantum computer market

The quantum computing market size is expected to increase from $89.6 million in 2019 to $1866.8 million by 2030 (according to a market research report published by P&S Intelligence), equating to a compound annual growth rate of 33.1%. Furthermore, on page 3 of the investor presentation, IONQ mentions a full $65 billion by 2030.

Of course, these are all estimates, and I doubt any evaluation extends more than two years into the future. However, it is almost certain that when quantum computers exceed the computing power of today’s best classical supercomputers, the market will be there, and it will be huge. This assumes that performance will also be practically usable without causing errors, which researchers have struggled to resolve so far. There are already quantum computers that are faster than today’s supercomputers, but so far, such computations perform their own custom computations and cannot be used for “everything” in general.

According to IBM, we don’t yet know how useful quantum computers will be. Among the early converts were financial managers and banks. Pharmaceutical companies can also become huge beneficiaries, and finally, quantum computers will help elevate machine learning and artificial intelligence to levels of complexity unimaginable to us today. And there will undoubtedly be many other areas of application, but from today’s point of view, these are just speculations.

IonQ vs. Competitive Systems

Many technologies are used for quantum computing qubits, such as superconductivity, photonics, silicon, spin qubits, trapped ions, etc. The quantum technology of choice for IONQ is trapped ion qubits created from an isotope of a rare earth metal called ytterbium that will turn into barium in the next generation. These barium-based systems are supposed to offer many advantages, such as lower error rates, systems that are easy to connect to the network, and increased uptime for customers.

In general, IONQ is more focused on keeping errors low, as their systems are already commercially available. It could be a potential risk for a company to commit to a particular technology too soon and therefore be less free to research than the competition: a side effect of an IPO. From now on, the market expects sales to rise sharply.

The current system runs on a 20-qubit algorithm and is expected to double within the next few years. However, it is necessary to remember that while these long-term forecasts are a goal for companies, they are never certain.

IONQ roadmap

IONQ March . Offer

Meanwhile, on November 15, IBM (IBM) introduced a chip with more than 100 qubits. The “Eagle” chip is a step toward IBM’s goal of creating a 433-qubit quantum processor next year, followed by an 1121-qubit processor, called the Condor, by 2023. Already in 2019, Google announced a 54-qubit processor with the goal of building a “computer”. useful quantum” by 2029.

Other competitors include Honeywell (HON) and several Chinese companies that are going their separate ways in this field. As we can see, it is a busy business as we will see a lot of discoveries and research in the future. It is impossible to predict who will build the most superior systems for years to come. But one thing is for sure: this will require massive capital and talent. Currently, IONQ has only 97 employees (according to the Seekings Alpha company profile), which seems like almost nothing and makes me wonder how such a small company can compete with multi-billion dollar companies. Sure, they have partners like the University of Maryland and Q Center in South Korea. But will this be enough? I don’t know. But what I do know is…

The future is already under evaluation

IONQ currently has a market capitalization of $2.5 billion with debt of $4.2 million and $603 million “cash and cash equivalents and investments” as of December 31, 2021, resulting in a project value of approximately $1.9 billion. According to the latest press release, 2021 revenue is $2.1 million ($1.6 million in the fourth quarter), which represents an EV/S ratio of 904. The company expects sales in 2022 to be between $10.2 million and $10.7 million, which is Corresponds to the sales ratio price of about 180.

The net loss for 2021 was $106.2 million, and the EBITDA loss was $28.3 million. For 2022, the adjusted EBITDA loss is expected to be approximately $55 million. So the cash burn rate continues to accelerate, but cash reserves are sufficient for at least a few more years. However, there is no indication if and when the company will be cash flow positive. In the current monetary and geopolitical environment, energy is becoming more expensive, and salaries are higher, especially for the highly educated talent that IONQ needs. They are constantly competing with competitors who can comfortably pay any compensation.

Insider selling and other risks

One thing I always check when stock prices appear high is whether there is an insider sale. I interpret this as an indication that these sellers think they are overpriced. So there’s not much to see here, especially since the stock price doubled in December. However, I mention it anyway because it’s always worth checking out the inside sale.

Insider sale IONQ

openinsider

I haven’t been able to figure out the price of reservations for quantum computers. Then I realized that there is very little information:

  • Who is booking and why?
  • Does it benefit IONQ customers at all?
  • Is it possible that these are just tests of individual companies?
  • Are these one-time bookings or recurring revenue?

Or in other words: I find it very difficult to assess whether or not this is an established business with high added value for IONQ clients. Without knowing it, how should private investors like us evaluate our investments? It is difficult to understand technical descriptions and developments for private investors. For example, how is anyone supposed to understand whether systems based on barium would be better than those made of ytterbium? So you should always rely on the information provided by the company. At the same time, we don’t know what the competition is currently looking at and how far they really are behind closed doors. It will be the same as in every area of ​​the economy: whoever offers the best product at the best price will prevail.

So there is a lot of uncertainty. However, the valuation is so high that years of strong growth have already been priced in. It is not an attractive risk-reward ratio. There are so many negative possibilities in this rating that I can hardly think of a catalyst that will send this extremely high rating even higher now.

But there is also a bright side

But of course, there are also many positive things about the company. They have demonstrated their concept and already have quantum computing systems in the clouds and have successfully monetized them. This may very well indicate that the company is technically ahead of the competition, especially in terms of a lower error rate, which research suffers from so much.

Moreover, the management team consists of highly qualified and highly educated people. Some have been researching this topic for decades and previously did basic quantum research at universities. Moreover, there is now joint research and development with Hyundai to create the next generation EV batteries. The company also has prominent investors (Amazon, Google) and clients (Goldman Sachs, Accenture).

The company may be a candidate for acquisition. While they don’t generate much revenue, intellectual property can be valuable. Moreover, their system is already running on Microsoft, Amazon and Google clouds. Therefore, it would not be out of reach if one of these three companies were interested in the acquisition. IONQ technology and staff will likely complement their research. At the moment, of course, these are purely guesswork, but they should be kept in mind, especially if you want to sell the stock due to its valuation.

It is tempting to sell stocks. However, there is also a risk: the hype around sharing and quantum computers may continue or increase. Moreover, the company can be a candidate for acquisition. If you want to sell, be sure to place a stop order so that the risk is limited. If you don’t want to do that, I think this company is an excellent candidate to wait and see. It’s possible that at some point, the company won’t reach its quarterly goals, and on that day, the stock price will drop sharply. There would be a better time to get in if you ever wanted to get in.

Conclusion

For all these reasons, investing is out of the question for me. So far, there is little revenue, a lot of research to do, a high valuation, and a business model that I can’t rate. Moreover, any competitor can achieve a breakthrough any day, causing the company to lag technologically. However, it is a stock that I want to keep on my watch list because it has the potential to be a winner in one of the next big trends.

Leave a Comment