Popular quantum computing stocks Rigetti, IonQ and D-Wave could face a reckoning next year.
The S&P500 (^GSPC +0.54%) fell 5% from early November highs as high valuations raised concerns about a stock market bubble, especially among technology companies involved in artificial intelligence (AI).
Granted, the entire stock market is expensive by historical standards, meaning AI has probably created a bubble to some extent. However, the size of the bubble is debatable. AI could have a truly profound impact on the economy within a few years, which could justify much of the enthusiasm in the current market.
The same cannot be said of quantum computing. Some experts believe the technology won’t be useful for most businesses in the next decade. Still, several quantum stocks have delivered outrageous returns over the past three years, leaving their valuations in bubble territory.
- Throws away computers (RGTI +0.00%) shares advanced 1,720%.
- IonQ (IONQ +5.12%) shares advanced 855%.
- D-wave quantum (QBTS +1.16%) shares advanced 794%.
Here’s what investors need to know about quantum computing, and why I think the bubble will burst next year.
Image source: Getty Images.
Quantum computing will be revolutionary, but the technology is still in its infancy
Classical computers use binary digits (i.e. bits) to represent information and perform calculations. Bits have only two values: 0 and 1. Relatively speaking, quantum computers use quantum bits (i.e. qubits) to perform calculations, and they behave very differently.
Qubits can exist in superposition states, meaning they can be a combination of zeros and ones at the same time. Qubits can also be entangled, meaning the state of one can be linked to the state of the other regardless of distance. Finally, qubits can influence each other in both good (constructive) and bad (destructive) ways.
These properties allow quantum processors to perform calculations that would be impossible or impractical with classical computers. Quantum systems are particularly good at solving optimization and simulation problems, which could revolutionize drug discovery, materials science, finance, cybersecurity, supply chain management and artificial intelligence.
Quantum processors can be made in different ways. IonQ manipulates captured ions with lasers to create qubits. Other companies, such as D-Wave, Rigetti, AlphabetAnd IBMallows electrons to pass through superconducting loops. Each approach has pros and cons, but each modality struggles with qubit stability to some extent.
Temperature changes, mechanical vibrations, electromagnetic radiation, and other types of environmental noise can cause qubits to lose their quantum states. That phenomenon, known as decoherence, leads to high error rates. No company has yet been able to create a fault-tolerant quantum system at scale, although IBM hopes to make that a reality by 2029.
Rigetti, IonQ and D-Wave are trading at absurd valuations and have diluted shareholders
Grand View Research estimates that quantum computing revenues will total $4 billion by 2030. By comparison, AI revenues are expected to reach $390 billion by 2025. That means companies will spend nearly 100 times more on AI this year than what they could spend on quantum computing in five years.
Industry experts have made similar forecasts. Earlier this year, Nvidia CEO Jensen Huang said “very useful” quantum computers will likely appear in 20 years. Around the same time, Alphabet CEO Sundar Pichai said that “practically useful” quantum computers are still at least five to 10 years away, and compared the technology to AI in the 2010s.
Assuming Pichai is right, buying shares of pure quantum stocks like IonQ, D-Wave and Rigetti would be like buying shares of Nvidia circa 2015. But the valuations are completely different. While Nvidia traded around three times sales in 2015, IonQ is the least expensive of those three quantum stocks at 145 times sales. D-Wave and Rigetti have price-to-sales ratios of 270 and 980, respectively.
Meanwhile, all three companies have taken advantage of their rising stock prices by issuing more shares to raise money, diluting investors. Over the past three years, D-Wave has increased its share count by 209%, Rigetti has increased its share count by 164% and IonQ has increased its share count by 77%. By comparison, Nvidia’s share count rose just 9% in the 2010s.
The bottom line: Quantum computing will undoubtedly revolutionize some industries, but many experts think those breakthroughs will be at least a decade away. Yet popular pure-play quantum stocks IonQ, D-Wave and Rigetti trade at outrageously expensive valuations, have diluted shareholders at an alarming rate and none of them are guaranteed to be a winner in the sector.
Ultimately, investors will have to take these issues into account. Given that the market is already tense about valuations, I think the reckoning will come sooner rather than later. That’s why I expect the quantum computer bubble to implode in 2026.
