From a valuation perspective, quantum computing stocks are on another planet.
Recently, all three of Wall Street’s major stock indexes climbed to fresh record-closing highs. The primary catalyst fueling these gains is investor optimism tied to game-changing technological advances, such as the evolution of artificial intelligence (AI).
When looking out to the horizon, it’s easy to get excited about the potential of Wall Street’s latest hyped technology. Quantum computing, which relies on specialized computers and the principles of quantum mechanics to solve complex equations that classical computers are incapable of, offers the ability to tackle difficult problems in a variety of industries and settings.
Though far from a complete list, quantum computers can be used to:
Online publication The Quantum Insider believes this technology can add $1 trillion in global economic value in a decade. Meanwhile, the analysts at Boston Consulting Group are looking for between $450 billion and $850 billion in economic value to be created worldwide from quantum computing by 2040.
We’ve also witnessed some very early evidence of quantum computing service adoption. Amazon’s quantum computing service Braket, which is operated on its world-leading cloud infrastructure service platform Amazon Web Services, is giving its subscribers access to quantum computers from IonQ and Rigetti Computing.
On paper, this technology has the potential to accelerate corporate America’s long-term growth rate and improve quality of life around the world. But at this very moment, quantum computing stocks are the most dangerous investment on Wall Street, based on what history tells us.
Image source: Getty Images.
More often than not, history is an ally of investors. For instance, history tells us that there hasn’t been a rolling 20-year period where the S&P 500 has delivered a negative total return, including dividends. This is a pretty resounding correlation in favor of optimistic, long-term investors.
At the same time, history offers two dire warnings for investors in IonQ, Rigetti Computing, D-Wave Quantum, and Quantum Computing, Inc.
Firstly, there’s the reality that every game-changing technological innovation and hyped trend for more than three decades has navigated its way through an eventual bubble-bursting event. Beginning with the internet in the mid-1990s, we’ve witnessed a myriad of technologies and next-big-thing trends be hyped and fail to live up to initial expectations, including genome decoding, China stocks, nanotechnology, 3D printing, blockchain technology, cannabis, and the metaverse.
Time and again, investors have demonstrated a willingness to overestimate the early innings adoption and utility of a new innovation or hyped trend. Every game-changing technology needs ample time to mature, without exception.
In the extremely early stages of quantum computing’s expansion, we’re seeing IonQ, Rigetti, D-Wave Quantum, and Quantum Computing, Inc., lose money hand over fist. It’s also so early in the rollout of this technology that businesses aren’t remotely close to optimizing quantum computing solutions. In short, this technology isn’t a profit-generator or game-changer for corporate America, as of yet.
However, IonQ, Rigetti, D-Wave, and Quantum Computing, Inc., stocks are trading as if it’s an optimized technology. History tells us this disparity will result in lofty investor expectations not being met.
The other historical headwind that absolutely cannot be swept under the rug or sugarcoated in any way is quantum computing stock valuations — specifically the price-to-sales (P/S) ratios of these high-flying pure-plays.
Prior to the bursting of the dot-com bubble in March 2000, publicly traded companies leading the internet revolution commonly peaked at P/S ratios ranging from 30 to slightly over 40. History has shown that P/S ratios at or near this range from industry leaders aren’t sustainable over an extended period.
On a trailing-12-month basis, the P/S ratios for Wall Street’s quantum computing darlings are (as of the closing bell on Oct. 15):
Even if we factor in double- and triple-digit annual sales growth over the next two years for these four pure-plays, their respective P/S ratios, based on Wall Street’s consensus sales forecasts in 2027, would respectively only fall to:
Given how far away corporate America is from the widespread adoption and utility of quantum computers, these ultra-premium valuations can’t be justified. If history tells us that P/S ratios of 30 to 40 for market leaders aren’t sustainable, imagine what awaits four unproven businesses with P/S ratios that are 2X to 12X above this historical peak range when priced at revenue two years into the future!
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Sean Williams has positions in Amazon. The Motley Fool has positions in and recommends Amazon. The Motley Fool has a disclosure policy.
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