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Reading:Are IONQ, FORM and IBM stocks a buy ahead of the quantum revolution?
Quantum computing promises to revolutionize the way we process information by leveraging the principles of quantum mechanics. This provides unprecedented computational power, enabling solutions to complex problems that are currently beyond the reach of conventional computers. This groundbreaking 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 that offer exposure to this potentially explosive sector.
However, despite the enormous potential in this field, I am neutral on FormFactor, a semiconductor company that offers lucrative exposure to quantum computing. We are bearish on surging pure-play quantum stock IonQ 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. Two concepts that underpin potential uses of quantum mechanics are superposition and quantum entanglement.
Quantum computers differ from the computers we use today in that they use quantum bits (qubits) instead of bits, the most basic unit of information in computing and digital communications. Qubits, unlike regular bits, can be in multiple states at once. This is called superposition and allows quantum computers to process vast amounts of information in parallel.
Entanglement, on the other hand, is when two qubits are connected and cannot be described independently, regardless of distance. It’s as if the qubits are connected by invisible threads, allowing for instantaneous communication. Albert Einstein called it “spooky action at a distance.”
This phenomenon allows 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 we’ll never really be able to harness the power of quantum mechanics for computing. Three companies – IonQ, FormFactor, and IBM – offer different levels and types of exposure to quantum technologies. Let’s explore.
IonQ is a pure play in quantum technology specializing in trapped ion quantum computing. The stock has been on the rise over the past month, but unfortunately, there is a bearish outlook for the stock this time around. Considering the execution risk, the valuation seems too high.
Trapped ion quantum computing uses individual ions floating in a vacuum as qubits, offering several advantages over other quantum computing technologies, including high fidelity, long coherence time, and precise control. The company is seeking to dominate the field of quantum networking, a field that could be worth $38 billion by 2040.
As mentioned above, IonQ leverages superposition and entanglement to transfer data between physically separate quantum processors. Interestingly, the company has achieved several notable breakthroughs, including hitting 99.9% fidelity in a two-qubit gate using barium ions. The company has also demonstrated ion-photon entanglement and ion-ion entanglement for commercial use.
Ultimately, this led to major deals and partnerships, including a $54.5 million contract with the US Air Force Research Lab and $72.8 million in annual bookings.
As a result of the transaction and progress, IonQ’s stock price soared 156% in 12 months. However, I am concerned that the stock price is overbought. Despite revenue forecasts of just $315 million by the end of 2027, the company’s market capitalization is now over $6 billion. Moreover, IonQ is expected to incur losses throughout the period. It also doesn’t help that the company’s price-to-book ratio (P/B) is the highest among its competitors.
Current assessments pose a high level of implementation risk for commercially unproven technologies. It is an area that requires a lot of investment and faces competition from major technology companies with relatively limited financial resources. So despite the huge promises, I’m bearish on IonQ purely because its valuation looks unbalanced at this point.
At TipRanks, IONQ is marked as Strong Buy based on 3 Buys, 1 Hold, and 0 Sells assigned by analysts over the last 3 months. IONQ’s average share price of $19.23 represents a 40% decline from its current level.
See more IONQ analyst reviews
I have a neutral stance on FormFactor, a major player in the semiconductor industry. That’s because FormFactor appears to be trading broadly in line with growth expectations. FormFactor provides critical test and measurement technologies across the entire life cycle of chipsets and offers a wide range of products including probe cards, analytical probes, probe stations, metrology systems and cryogenic systems.
FormFactor recently entered the exciting field of quantum computing through collaborations with Tabor Electronics and QuantWare. Echo-5Q, a full-stack five-qubit quantum computer designed for research and education, integrates FormFactor’s advanced cryogenics and QuantWare’s high-performance quantum processing units to achieve a 250% improvement in T1 relaxation time compared to similar systems.
Analysts therefore see the quantum sector as a tailwind for the semiconductor company. This stock could be a unique play on quantum computing, as the company is already seeing profitable sales from its quantum computing segment. But at least for now, quantum products are still in their infancy.
Looking at FORM stock more broadly, it is trading at a relatively high multiple (35.4x forward earnings), which is a 40% premium to the Information Technology sector. Even at a 7% discount to the sector, a price-to-earnings-growth (PEG) ratio of 1.78 does not inspire confidence in me. At least for now, it’s neutral.
Additionally, on TipRanks, FORM is marked as a Moderate Buy based on analyst assignments of 3 Buys, 3 Holds, and 0 Sells over the last 3 months. FORM’s average share price of $53 implies a 32% upside from current levels.
See more FORM analyst reviews
The final stock I’m looking at today is IBM, a global leader in technology and innovation. Unfortunately, I am also bearish. The company has been at the forefront of quantum computing development for some time, but its stock price is overvalued relative to expected growth.
IBM has invested heavily in quantum research and development as part of its strategic focus, positioning it as a key player in the rapidly evolving quantum landscape. One of IBM’s most important milestones was the development of a 1,121-qubit chip known as the IBM Quantum Condor. This represents a significant increase in qubit capacity. The company had ambitious plans for the near future, including commercializing a 1,000-qubit computer and developing a 10,000-qubit quantum computer.
In addition to its extensive efforts in the field, the company’s open source Qiskit framework fosters collaboration and innovation within the quantum community, further solidifying its role as a pioneer in the field. IBM does not detail how much it spends on quantum computing research. However, there is no doubt that it is one of the biggest investors in this new technology. Our existing achievements, coupled with our deep pockets, undoubtedly position us to lead the quantum era.
However, despite its quantum potential, I am concerned about IBM’s valuation. The stock trades at 21.8 times forward earnings, a 13% discount to the sector average, but its PEG ratio of 4.4 is a 129% premium to the sector. Simply put, we have no choice but to be bearish because the stock appears overvalued relative to its earnings prospects.
At TipRanks, IBM has a Moderate Buy rating, based on 5 Buys, 7 Holds, and 1 Sell from analysts over the past three months. The average IBM stock price of $229.75 implies a 1% upside from current levels.
View more IBM analyst ratings
Unfortunately, none of these stocks scream buy to me right now. However, my preferred quantitative indicators tend to miss new opportunities in emerging sectors. Nonetheless, my view is that these companies are still some distance away from actually commercializing quantum systems and are difficult to invest in today given the execution risk.
