Quantum computing promises to revolutionize the way we process information by leveraging the principles of quantum mechanics. It will offer unprecedented computational power, enabling solutions to complex problems that are currently unsolvable by classical computers. This breakthrough 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’m neutral on FormFactor—a semiconductor company with profitable exposure to quantum computing—bearish on IonQ—a surging, pure-play quantum stock—and bearish on tech giant IBM.
But first, what is a quantum computer? Well, it leverages quantum mechanics, which describes the behavior of matter and energy at the atomic and subatomic levels. There are two concepts that underpin the potential use of quantum mechanics: superposition and quantum entanglement.
Quantum computers are different from the computers we use today because they use quantum bits (qubits) instead of bits—the most basic unit of information in computing and digital communication. Qubits, unlike normal bits, can be in multiple states at one time. This is known as superposition and enables quantum computers to process vast amounts of information in parallel.
Entanglement, on the other hand, is when two qubits become linked and cannot be described independently, regardless of distance. It’s as if the qubits are connected by an invisible thread, allowing instantaneous communication. Albert Einstein called it “spooky action at a distance.”
These phenomena enable quantum computers to perform complex calculations exponentially faster than classical computers for certain problems. The issue is that the technology simply isn’t there yet, and some people believe we will never truly be able to harness the power of quantum mechanics for computing. These three companies, IonQ, FormFactor, and IBM, offer varying levels and types of exposure to quantum technology. Let’s explore.
IonQ is the pure play on quantum technology, specializing in trapped ion quantum computing. The stock has surged over the last month, but unfortunately, I’m bearish on this one. The valuation appears too high, given the execution risk.
Trapped ion quantum computing uses individual ions suspended in a vacuum as qubits, offering several advantages over other quantum computing technologies, such as high fidelity, long coherence times, and precise control. The firm is looking to dominate in quantum networking — a field that could be worth $38 billion by 2040.
As noted above, IonQ leverages superposition and entanglement to transfer data between quantum processors that are physically separated. Interestingly, the company has achieved some notable breakthroughs, including recording 99.9% fidelity on two-qubit gates using barium ions. The firm has also demonstrated ion-photon entanglement for commercial use and ion-ion entanglement.
In turn, this has led to major deals and partnerships, including a $54.5 million contract with the U.S. Air Force Research Lab and year-to-date bookings of $72.8 million.
As a result of its deals and progress, IonQ stock has surged 156% over 12 months. However, I’m concerned that the stock is overbought. The company’s market cap has now exceeded $6 billion despite a revenue forecast of just $315 million by the end of 2027. Moreover, IonQ is expected to operate at a loss throughout the period. It also does not help that the company’s price-to-book (P/B) ratio is the highest among its competitors.
The current valuation introduces a high degree of execution risk in what remains a commercially unproven field of technology. It’s also a field that requires plenty of investment, and it’s facing competition from major tech companies with comparatively bottomless pockets. So, despite the huge promise, I’m bearish on IonQ purely because its valuation seems disproportionate at this moment in time.
On TipRanks, IONQ comes in as a Strong Buy based on three Buys, one Hold, and zero Sells assigned by analysts in the past three months. The average IONQ stock price of $19.23 implies 40% downside from current levels.
I’m neutral on FormFactor, a prominent player in the semiconductor industry, because it appears to be trading broadly in line with growth expectations. FormFactor provides critical test and measurement technologies that span the entire lifecycle of chipsets, offering 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 high-performance quantum processing units, resulting in a 250% improvement in T1 relaxation times compared to similar systems.
As such, analysts see the quantum sector as a tailwind for this semiconductor company. The stock could be an unconventional play on quantum computing, with the company already seeing profitable sales in the quantum computing sector. However, for now, at least, its quantum offering is still in its early stages.
Looking at FORM stock more broadly, it trades at relatively high multiples (35.4x forward earnings) – a 40% premium to the information technology segment. The price-to-earnings-to-growth (PEG) ratio of 1.78, despite being at a 7% discount to the sector, doesn’t fill me with confidence. For now, at least, I’m neutral.
Furthermore, on TipRanks, FORM comes in as a Moderate Buy based on three Buys, three Holds, and zero Sells assigned by analysts in the past three months. The average FORM stock price of $53 implies 32% upside from current levels.
The final 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 quantum computing development for some time, but the stock is overvalued relative to its 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 most significant milestones is the development of a 1,121-qubit chip known as the IBM Quantum Condor. This marked a substantial leap 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 solidifying its role as a pioneer in the field. IBM doesn’t detail how much it spends on quantum computing research. However, it’s undoubtedly among the largest investors in this new technology. Its existing achievements, coupled with deep pockets, undoubtedly position it well to lead in the quantum era.
However, I’m concerned by IBM’s valuation despite its quantum potential. The stock trades at 21.8x forward earnings, a 13% discount versus the sector average, but has a PEG ratio of 4.4 – a 129% premium to the sector. In short, since the stock looks overvalued versus its earnings forecasts, 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 assigned by analysts in the past three months. The average IBM stock price of $229.75 implies 1% upside from current levels.
Sadly, none of these stocks currently scream buy to me. However, quantitive metrics, which I tend to favor, can be prone to missing new opportunities in emerging sectors. Nonetheless, my feeling is that these companies are still some distance away from truly commercializing quantum systems and that makes it challenging to invest today, given the execution risk.
