Uncle Sam Is Buying Into Quantum Computing Stocks. Should You?

With the U.S. government recently making a $2 billion total investment in nine quantum computing companies, some investors who've been sitting on the sidelines are no doubt wondering whether they're missing out.

The share prices of IBM (NYSE: IBM), IonQ (NYSE: IONQ), D-Wave (NYSE: QBTS), and Rigetti Computing (NASDAQ: RGTI) all jumped on the news, each of them having received a sizable portion of that $2 billion investment -- with half going to IBM alone.

But should investors follow Uncle Sam and buy these quantum computing stocks?

Maybe not quite yet.

Image source: Getty Images.

Where the quantum computing market is right now

Things are moving in the right direction for quantum computing companies. More companies and research institutions are buying into the idea that this technology could help accelerate research in a host of areas, from helping discover new materials and pharmaceuticals to enhancing artificial intelligence (AI) models or modeling complex systems.

And that optimism is driving a shift toward more deals. Here are just a few from the past 12 months:

• Rigetti secured a $8.4 million order from India's Center for Development of Advanced Computing to deliver on-premises quantum processing units.
• D-Wave announced a record-breaking $33.4 million in bookings for the first quarter, thanks to a $20 million system sale to Florida Atlantic University and a $10 million enterprise cloud agreement with a Fortune 100 corporation.
• IBM partnered with the Department of Commerce to establish Anderon, a new quantum wafer foundry in New York.
• IonQ secured a $39 million contract with the Space Development Agency for tactical space communications.

And it's not just the industry leaders that are making waves. Nvidia, which is not developing a quantum computer or processor itself, recently released a collection of open-source AI models, called Ising, designed to improve error correction in quantum computers.

That's a notable move to keep itself connected to this nascent industry, particularly considering that Nvidia CEO Jensen Huang said just last year that in his view, "very useful quantum computers" were 15 to 20 years away.

Sales from most of the leading quantum computing companies are also soaring, though admittedly from low bases. IonQ's revenue surged 755% in the first quarter, and Rigetti's jumped 199%. IBM's was a much more modest (but respectable for a company of its size) 9% increase, and the vast majority of its business is not connected to quantum computing. D-Wave was the outlier: Its revenue fell 81%.

Quantum computing is an expensive bet

There's nothing inherently wrong with investors placing bets on a new technology a little early. And quantum computing certainly seems poised to become a transformative technology. McKinsey estimates the global quantum computing market could be worth $100 billion by 2035.

But buying shares of IonQ, Rigetti, or D-Wave is pretty risky right now, given the companies' losses: Here's where they stand on an adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) basis.

Data sources: IonQ, Rigetti Computing, D-Wave, and IBM.

You'll quickly notice the outlier in the bunch: IBM, with its many established tech businesses, is the only company on this list to have positive adjusted EBITDA. Meanwhile, pure plays IonQ, Rigetti, and D-Wave are burning through cash, and it could be many years before they become profitable.

It's worth mentioning that IonQ has $3.1 billion in cash and cash equivalents on the books, D-Wave has $588 million, and Rigetti has $569 million. Still, IBM aside, investors should be aware of the uphill battle these companies will face in their attempts to achieve profitably.

What's more, the hype around quantum computing's potential has driven the valuations of the pure plays to outlandish levels. D-Wave has a price-to-sales (P/S) ratio of 768, while Rigetti's is above 800. Meanwhile, IonQ has a P/S ratio of about 163. For comparison, the tech sector's average P/S ratio is about 7.7.

These are extremely high premiums to pay for unprofitable companies pursuing unproven technologies.

But if you're really eager to invest in quantum computing, IBM stock looks like the best bet out of all of these. Not only has the company been developing quantum computers for many years, but it's also profitable, with a price-to-earnings (P/E) ratio of about 22 right now -- far lower than the industry average of 35.

For now, I think investors should wait to see which of the pure plays can show more meaningful progress before adding such companies to their portfolios. But putting some money into IBM would be a relatively safe way to dip your toe into this nascent technology.

Chris Neiger has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends International Business Machines, IonQ, and Nvidia. The Motley Fool has a disclosure policy.