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Quantum computing arguably has the potential to be one of the most important technology trends of the century. But with the technology not yet ready for broad commercialization, many investors are unsure if this is the right time to buy a quantum computing stock.
IonQ (NYSE: IONQ), Rigetti Computing (NASDAQ: RGTI), D-Wave Quantum (NASDAQ: QBTS), and International Business Machines (NYSE: IBM) are four leading players in a quantum technology market that McKinsey forecasts could grow to be worth as much as $100 billion by 2035.
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But these companies still have a lot to prove before I'd feel comfortable buying their shares.
Here's why it's worth keeping an eye on these quantum stocks, but not worth hitting the buy button right now.
IonQ is one of the most popular pure-play quantum computing stocks, and attracted some fresh attention from investors after reporting that its sales rose 287% to $80.1 million in the second quarter.
But much of that growth came from acquisitions, which made its results less impressive. What's more, IonQ's non-GAAP (adjusted) EBITDA (earnings before interest, taxes, depreciation, and amortization) loss came in at $120.3 million, significantly worse than its $36.5 million loss in the year-ago quarter.
However, IonQ has $3 billion in cash and cash equivalents on its books, so it can keep operating with losses of that scale for a while.
IonQ stock trades at a price-to-sales ratio (P/S) of 59 right now, which isn't as high as some of its pure-play peers, but is still far higher than the average tech sector P/S ratio of about 8.
If you're interested in buying IonQ, keep an eye on the company's path to profitability. CEO Peter Chapman has said IonQ could achieve that goal by 2030, but it will need to significantly boost organic revenue and reduce losses to get there.
Rigetti Computing's sales rose by 185% in the second quarter, but that figure is less impressive than it appears, at first glance, given that revenue was just $5.1 million.
Rigetti's leadership has said that its efforts to bring in meaningful commercial revenue are still in their early stages, and CEO Subodh Kulkarni says that the company is "focused on a clear sequence designed to position Rigetti to reach quantum advantage in roughly three years." That means investors shouldn't expect significant sales to materialize before 2029 or 2030.
In the meantime, Rigetti is debt-free and has about $541 million in cash, which should be enough to keep the company's operations running, even as it continues to lose money.
Rigetti stock is one of the most expensive on this list, with a P/S ratio of 396. That's an astronomically high price to pay for a company with so little revenue.
D-Wave Quantum's share price has skyrocketed by more than 1,600% over the past three years and remains a top pick among investors who want exposure to the quantum computing space. But I have some significant concerns about D-Wave.
The first is that its sales are very lumpy. D-Wave's revenue declined slightly in the second quarter to just $3.1 million. Making matters worse, the company is burning through cash, with an adjusted EBITDA loss of $37.1 million for the quarter.
Like its peers, D-Wave has enough cash and cash equivalents to keep the lights on for a while -- about $546 million as of the end of Q2. But D-Wave will have to smooth out its lumpy revenue and significantly increase its sales over the next several years if it's going to remain a significant quantum computing contender.
That's true of all the pure-plays on this list, but it's especially true for D-Wave. Making matters worse, its shares trade at a price-to-sales ratio of 485 -- by far the most expensive among its peers.
IBM isn't a pure-play quantum computing company, and that might be a good thing for potential investors, as it makes IBM a lower-risk pick, and one that earns profits from its more mature businesses.
Consider that IBM's total revenue increased about 1% in the second quarter to $17.2 billion, and its non-GAAP earnings rose 5% to $2.93 per share.
IBM's management believes quantum computing will soon play a more important role within the company.
"I think that in 2028 or 2029, you'll see it [quantum computing] have a measurable impact on our top line and bottom line," said CEO Arvind Krishna during a July interview on CNBC.
IBM says it's on track to deliver the first large-scale fault-tolerant quantum computer by 2029, and will spend $10 billion over the next five years to get its technology ready for broad use.
IBM's stock trades at a price-to-earnings ratio of just 20, which is far less expensive than the tech sector average P/E ratio of 33. But it's worth noting that the stock hasn't been a top performer recently. IBM stock has lagged the S&P 500's returns over the past three years, making its shares a low-risk but also lower-reward option.
Still, if you're looking to invest in a quantum computing company that's also tapping into artificial intelligence and other tech trends -- and that's profitable -- IBM could be a good option.
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Chris Neiger has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends International Business Machines and IonQ. The Motley Fool has a disclosure policy.
Should You Buy These 4 Quantum Computing Stocks Before 2027? was originally published by The Motley Fool
