Quantum computing actions. Meet AI Hype. – Nanalyse

“If you think AI is cool, wait until it meets quantum computing.” That was the headline of a recent Forbes piece by a SAP communications officer trying to bring his company’s reputation for quantum computing and generative AI to the forefront. The article continues with a quote from a thought leader at (wait for it) SAP stating, “Continued advances in quantum hardware, middleware, and software will lead to the development of a generic quantum advantage machine by 2030.” So, are we still at least five years away from a commercially viable quantum computer? Alright then.

As dozens of companies around the world work on various aspects of quantum computing, retail investors are hoping that one of the three quantum computing stocks on offer (that’s all because of the SPACs) will emerge as a winner-takes-all leader. How can we tell that a leader is emerging? There are several potential outcomes:

• Leaders are private companies whose progress is not disclosed as they are not publicly traded. Their client list is confidential, and strangers have no idea they’ve pulled off. One expert we interviewed believes leaders will keep their progress under wraps.
• The leaders are giant tech companies that have been plowing billions into the problem for decades — names like Google, Microsoft, and Intel that are all dabbling in quantum computing. Google declared quantum supremacy in 2019, so game over, right?
• The Leader is a publicly traded pure-play company dedicated to quantum computing. The key indicator here is revenue. If even the experts disagree on what quantum supremacy is, the only indication that you’ve built something great is that people are throwing money at you for using it.

Either way, revenue is the clearest indicator that any quantum computing company has built something that others find value in. This brings us to AI, which may be in the spotlight now, but it’s something leaders have been thinking about for some time. A little over six years ago, our piece on Artificial Intelligence (AI) and Quantum Computing talked about how quantum computing hardware could allow us to advance AI. Today the situation seems to be reversed. If generative AI algorithms have already mastered protein folding, something quantum computers were expected to accomplish, then perhaps we can use them to accelerate the arrival of quantum computing. “But quantum computers are already here!” you might exclaim, pointing to the availability of D-Wave’s $10 million computer six years ago. This is a good follow up of what D-Wave (QBTS) did.

D-Wave takes a little dive

A $10 million quantum computer can be a big sale, so why not offer it? Quantum-ccalculation-AS-A–Stservice (QCaas)? That’s the direction D-Wave is taking, though we’d expect customers to spend more over time, not less. Services don’t scale easily, so our focus is primarily on QCaaS revenues which are declining over time along with total revenues.

In an effort to boost its share price to avoid being delisted, D-Wave has hired an “investor awareness and recognition” firm that issues press releases on how D-Wave “is ready to execute the governments handover Americans to quantum computing”. Brace yourself and five bucks might get you a cup of coffee from Starbucks. Little did we know that companies could work their way up to gain exposure on platforms like Seeking Alpha, Business Insider, or directly target all those naïve rookie investors on Robinn-the-hood who might have some capital left over after hedge funds like Citadel have finished escaping them.

So, if you come across articles discussing how D-Wave is at the pinnacle of quantum computing generative AI greatness, what should you do? That’s right, little Johnny, you ignore them. Always look at revenue growth as a key indicator that a company has built something that its customers will pay money to access. Not only is D-Wave well short of our $1 billion market cap threshold, it has failed to generate significant revenue ($10 million or more in just one year) which is a testament to how precious (or not) customers find their QCaaS offer. For the FOMO lot that throws caution to the wind, a simple valuation ratio (SVR) of 40 shows QBTS stock is extremely rich, right up there next to the likes of NVIDIA (NVDA). But that’s nothing compared to how rich our next company is.

IonQ is being pumped

IonQ (IONQ) has no problem meeting our market cap cap as it approaches the $3 billion mark. It’s the same hype we covered earlier this year in our video about IONQ Stock Update | An advertising problem. Like that video, this article will appeal to the cheerleaders who shove the company’s value proposition down your throat while completely ignoring the ludicrous valuation: an SVR of 161. To put that into perspective, IONQ shares should trade at $3.42 before share the same rating as D-Wave and $1.71 to share the same rating as Snowflake (SNOW). Last quarter, IONQ had annualized revenue of approximately $17 million, and that was before you pulled related-party revenue (about 23% of total revenues in the last quarter). Cheerleaders wait with bated breath for every fluffy press release the company releases, while the underlying truth is always revenue.

The above press release on how “IonQ Increases 2023 Bookings” states that as a result of this announcement “the Company is not raising its expectations for recognized revenues in 2023.” If reservations are a great sign of progress, then why not? Always focus on revenue, not bookings. And no, bookings haven’t come in, no matter how much the cheerleaders try to convince people that this is the case. Take an accounting course if you are confused about the difference between the two.

If IONQ were rated at an SVR of 20 (a valuation at which we may consider buying shares), which would equate to a market cap of $342 million or a share price of $1.71. Because we only invest in companies with a market capitalization greater than $1 billion, they should have annualized revenues of $50 million before considering an investment in the company. According to their polished SPAC deck, investors can expect to wipe out that number next year when the company hits $60 million in revenue. Then, you read the fine print and realize that “revenues may include recognized advance payments, reservations and contracts” and you quickly realize that whoever put together that SPAC deck must also take an accounting course. There is absolutely nothing deserving of this company’s absurd rating except for hype, and a quick Twitter search for $IONQ shows there is no shortage of that. This brings us to the last quantum computing stock on our list: Reject Computing (RGTI).

Don’t forget Rejects

A little over a year ago, we wrote about it Discards Computing Stock: A Risky Bet on Quantum Computingeng. In that piece, we expressed concern about how they haven’t yet achieved significant revenue, what we call $10 million in the calendar year. According to their SPAC deck, that issue should have cleared last year with $18 million in revenue expected. Reality? About half of that, and the first quarter of this year didn’t start well with just $2.2 million in revenue. Perhaps there is some element of seasonality here, as Q4 2022 saw revenues bring in $6 million? To reconcile the variability, we can use the average quarterly revenues over the last twelve months to calculate the simple valuation ratio which comes in at a “modest” 16. Seasonality also comes from customer concentration risk and in the last quarter a single customer has represented more than half of their revenues (three customers account for 92% of total revenues).

This client concentration risk means that we would not consider an investment in Rigetti even if it were not well below our market capitalization threshold.

Conclusion

The interactions between quantum computing and artificial intelligence don’t matter much unless they translate into revenue growth. The rich valuation of quantum computer stocks shows that some of that enthusiasm for AI is spreading, and anyone looking for exposure here needs to remember the importance of investing in companies, not stocks. Because when all the dust settles, that’s what you’ll be left with. As for those who think there is an easy short here, the irrationality of the herd will always outlive your margin limits. When you see spectacular levels of hype, it’s always best to walk away and check back in a year, which is exactly what we’ll be doing.