Quantum computing promises to revolutionize the way we process information by using the principles of quantum mechanics. It will provide unprecedented computing power, enabling solutions to complex problems that are currently unsolvable by classical computers. This breakthrough technology has the potential to revolutionize industries such as cryptography, drug discovery, and artificial intelligence. IonQ Inc ( IONQ ), FormFactor ( FORM ), and IBM ( IBM ) are among the stocks that provide exposure to this potentially explosive sector.
However, despite the huge potential of this sector, I am neutral on FormFactor-a semiconductor company with profits for quantum computing-bearish on IonQ-a surging, pure-play quantum stock-and bearish on the technology giant IBM.
But first, what is a quantum computer? Yes, it uses quantum mechanics, which describes the behavior of matter and energy at the atomic and subatomic level. There are two concepts that underpin the potential uses 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 basic units of information in digital computing and communication. A qubit, unlike a normal bit, can be in multiple states at once. This is known as superposition and enables quantum computers to process large amounts of information in parallel.
Entanglement, on the other hand, is when two qubits become linked and cannot be explained independently, regardless of their distance. It is as if the qubits are connected by an invisible thread, allowing direct 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 problem is that the technology doesn’t exist yet, and some people believe that we will never be able to 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 a pure play in quantum technology, specializing in quantum computing of trapped ions. Stocks have surged over the last month, but unfortunately, I’m bearish on this one. The value seems too high, because of the execution risk.
Trapped ion quantum computing uses individual ions suspended in vacuum as qubits, offering several advantages over other quantum computing technologies, such as high fidelity, long coherence times, and precise control. The company wants to dominate in quantum networks – a field that could be worth $38 billion by 2040.
As mentioned above, IonQ uses superposition and entanglement to move data between physically separated quantum processors. Interestingly, the company has achieved several notable breakthroughs, including recording 99.9% fidelity in a two-qubit gate using barium ions. The company also demonstrated ion-photon entanglement for commercial use and ion-ion entanglement.
In turn, this led to major deals and partnerships, including a $54.5 million contract with the US Air Force Research Laboratory and an annual order of $72.8 million.
As a result of the transaction and progress, IonQ’s stock is up 156% in 12 months. However, I am concerned that the stock is overbought. The company’s market capitalization has now exceeded $6 billion despite the forecast revenue of only $315 million by the end of 2027. In addition, IonQ is expected to operate at a loss during this period. It also doesn’t help that the company’s price-to-book (P/B) ratio is the highest among its competitors.
Current valuations introduce a high level of execution risk in areas of technology that are not yet commercially proven. It’s also a field that requires a lot of investment, and faces competition from major tech companies with bottomless pockets. So, despite the huge promise, I’m not worried about the IonQ as the price seems disproportionate at this point.
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. IONQ’s average share price of $19.23 represents a 40% decline from current levels.
Read more IONQ analyst ratings
I am neutral on FormFactor, a prominent player in the semiconductor industry, as it appears to be trading broadly in line with growth expectations. FormFactor provides critical test and measurement technologies that span the entire chipset lifecycle, offering a wide range of products, including probe cards, analytical probes, probe stations, metrology systems, and cryogenic systems.
Recently, FormFactor has been exploring the exciting field of quantum computing through collaborations with Tabor Electronics and QuantWare. Echo-5Q, a full-stack 5-qubit quantum computer designed for research and education, combines FormFactor’s cryogenic technology with QuantWare’s high-performance quantum processing unit, resulting in a 250% improvement in T1 relaxation time compared to similar systems.
As such, analysts see the quantum sector as a tailwind for these semiconductor companies. The stock could be an unconventional play in quantum computing, with the company already seeing lucrative sales in the quantum computing sector. However, for now, at least, quantum offerings are still in their early stages.
Take a closer look at FORM stock, trading at a relatively high multiple (35.4x forward earnings) – a 40% premium to the information technology segment. The price-to-earnings-to-growth (PEG) ratio of 1.78, even at a 7% discount to the sector, does not 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 over the past three months. FORM’s average share price of $53 represents a 32% upside from current levels.
Read more FORM analyst ratings
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 computing for some time, but the stock is overvalued relative to the 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 was the development of a 1,121-qubit chip known as the IBM Quantum Condor. This marks a huge leap in qubit capacity. The company has ambitious plans, including commercializing a 1,000-qubit computer in the 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 in the quantum community, further strengthening its role as a pioneer in the field. IBM did not detail the cost of quantum computing research. However, it is certainly among the biggest investors in this new technology. His existing achievements, coupled with his deep pockets, are sure to make him a leader in the quantum era.
However, I am concerned with IBM’s valuation despite its quantum potential. The stock trades at 21.8x forward earnings, a 13% discount compared to the sector average, but has a PEG ratio of 4.4 – a 129% premium to the sector. In short, because the stock looks overvalued against the earnings forecast, 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 over the past three months. IBM’s average share price of $229.75 represents an increase of 1% from the current level.
Read more IBM analyst ratings
Sadly, none of these stocks currently scream buy to me. However, quantitative metrics, which I prefer, can easily miss new opportunities in emerging sectors. However, my feeling is that these companies are still far from a truly commercialized quantum system and it is a challenge to invest in them now, because of the execution risk.
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