Quantum computing promises to revolutionize the way we process information by utilizing the principles of quantum mechanics. It will provide unprecedented computing power and enable solutions to complex problems currently unsolvable by classical computers. This groundbreaking technology has the potential to transform industries such as cryptography, drug discovery and artificial intelligence. IonQ Inc (IONQ), FormFactor (FORM) and IBM (IBM) are among the stocks offering exposure to this potentially explosive sector.
However, despite the huge potential of this sector, I am neutral on FormFactor – a semiconductor company with profitable exposure to quantum computing, bearish on IonQ – a soaring pure quantum stock – and bearish on tech giant IBM.
But first: what is a quantum computer? Well, it uses quantum mechanics, which describes the behavior of matter and energy at the atomic and subatomic level. There are two concepts underlying the potential use of quantum mechanics: superposition and quantum entanglement.
Quantum computers differ from the computers we use today because they use quantum bits (qubits) instead of bits – the most fundamental unit of information in computing and digital communications. Qubits, unlike normal bits, can be in multiple states at the same time. This is known as superposition and allows quantum computers to process large amounts of information in parallel.
Entanglement, on the other hand, is when two qubits become connected and cannot be described independently, regardless of distance. It is as if the qubits are connected by an invisible wire, allowing instant communication. Albert Einstein called it ‘spooky action at a distance’.
These phenomena ensure that quantum computers can perform complex calculations exponentially faster than classical computers for certain problems. The problem is that the technology simply isn’t there yet, and some people believe we’ll never be able to truly harness the power of quantum mechanics for computing. These three companies, IonQ, FormFactor and IBM, offer different levels and types of exposure to quantum technology. Let’s explore.
IonQ is the pure play on quantum technology, specializing in quantum computers with trapped ions. The stock has soared over the past month, but unfortunately I’m bearish on this. The valuation seems too high, given the execution risk.
Trapped ion quantum computers use individual ions suspended as qubits in a vacuum, which offers several advantages over other quantum computing technologies, such as high reliability, long coherence times, and precise control. The company wants to dominate in the field of quantum networking – a field that could be worth $38 billion by 2040.
As noted above, IonQ uses superposition and entanglement to transfer data between quantum processors that are physically separated. Interestingly, the company has made a number of notable breakthroughs, including recording 99.9% reliability on two-qubit gates using barium ions. The company has also demonstrated ion-photon entanglement for commercial use and ion-ion entanglement.
This in turn has led to major deals and partnerships, including a $54.5 million contract with the US Air Force Research Lab and year-to-date bookings of $72.8 million.
As a result of the deals and progress, IonQ stock has risen 156% in twelve months. However, I fear the stock is overbought. The company’s market capitalization has now surpassed $6 billion, despite forecasting revenues of just $315 million by the end of 2027. Furthermore, IonQ is expected to operate at a loss throughout the period. It also doesn’t help that the company’s price-to-book ratio (P/B) is the highest among its peers.
The current valuation carries a high degree of execution risk in what remains a commercially unproven area of ​​technology. It’s also a field that requires a lot of investment, and faces competition from big tech companies with relatively bottomless pockets. So despite the huge promise, I’m bearish on IonQ purely because its valuation seems disproportionate at the moment.
On TipRanks, IONQ comes in as a Strong Buy based on three buys, one hold, and zero sells assigned by analysts over the past three months. The average IONQ share price of $19.23 implies a decline of 40% from current levels.
I am neutral on FormFactor, a prominent player in the semiconductor industry, as trading appears to be broadly in line with growth expectations. FormFactor provides critical test and measurement technologies that span the entire life cycle of chipsets and offers a wide range of products including probe cards, analytical probes, probe stations, metrology systems and cryogenic systems.
Recently, FormFactor has ventured into the exciting field of quantum computing through its collaboration with Tabor Electronics and QuantWare. The Echo-5Q, a full-stack 5-qubit quantum computer designed for research and education, integrates FormFactor’s advanced cryogenic technology with QuantWare’s powerful quantum processing units, resulting in a 250% improvement in T1 relaxation times compared to comparable systems .
Analysts therefore see the quantum sector as a tailwind for this semiconductor company. The stock could be an unconventional play in quantum computing, with the company already seeing profitable sales in the quantum computing sector. But for now, at least, the quantum offering is still in its early stages.
Looking at FORM shares more broadly, they trade at relatively high multiples (35.4x forward earnings) – a 40% premium to the information technology segment. The price-earnings-growth ratio (PEG) of 1.78, despite a 7% discount to the sector, doesn’t give me much confidence. At least for now I’m neutral.
Additionally, FORM comes in on TipRanks as a Moderate Buy based on three buys, three holds, and zero sells assigned by analysts over the past three months. The average FORM share price of $53 implies an upside of 32% from current levels.
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The last stock I’m looking at today is IBM, a global leader in technology and innovation, and unfortunately I’m also bearish. The company has been at the forefront of the development of quantum computers for some time, but the stock is overvalued compared to expected growth.
As part of its strategic focus, IBM has invested heavily in quantum research and development, positioning itself as a key player in the rapidly evolving quantum landscape. One of IBM’s major milestones is the development of a 1,121-qubit chip known as the IBM Quantum Condor. This represented a significant jump in qubit capacity. The company had ambitious plans, including commercializing 1,000-qubit computers in the near future and developing a 10,000-qubit quantum computer.
In addition to broader efforts in the field, the company’s open-source Qiskit framework facilitates collaboration and innovation within the quantum community, further strengthening its role as a pioneer in the field. IBM does not detail how much it spends on quantum computing research. However, it is undoubtedly one of the largest investors in this new technology. Its existing achievements, coupled with deep pockets, undoubtedly position the country well to lead in the quantum era.
However, I’m concerned about IBM’s valuation, despite its quantum potential. The stock trades at 21.8x forward earnings, a 13% discount to the industry average, but has a PEG ratio of 4.4 – a 129% premium to the industry. In short, since the stock appears overvalued compared to earnings estimates, I can’t help but be bearish.
On TipRanks, IBM comes in as a Moderate Buy based on five buys, seven holds, and one sell trades assigned by analysts over the past three months. The average IBM stock price of $229.75 implies an upside of 1% from current levels.
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Unfortunately, none of these stocks are screaming for me to buy right now. However, quantitative measures, which I prefer, can lead to missing new opportunities in emerging sectors. Nevertheless, I feel that these companies are still a long way from actually commercializing quantum systems, and that makes it difficult to invest today given the execution risk.
