Down 26%, Should You Buy the Dip on IonQ?

Quantum computing specialist IonQ (NYSE: IONQ) soared to an all-time high in mid-October, but has backed down from that peak recently. The stock closed at $59.37 per share on Oct. 23, 28% below the $82.09 mark on Oct. 13.

Is this dip an invitation to buy IonQ stock, or the start of a deeper downturn -- or something in between? Let's take a look.

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Why quantum computing could change everything

Quantum computing should eventually turn the number-crunching world upside-down. Monitoring the physics of specially designed materials is a radically different computing method from the classical routing of digital signals through various types of logic gates.

In the long run, quantum systems should get very good at finding patterns in large data sets. In practice, people may use this new computing paradigm to decode genetic data, decrypt encrypted information, analyze financial markets, and more. I've got my fingers crossed for a quantum supercomputer finally figuring out the objectively correct way to raise your kids, but let's not hold our breath on that one.

Hold that thought, though (while breathing comfortably).

So far, IonQ is one of the largest and most successful developers of quantum computing systems. With $52.4 million of trailing revenue and a market cap of $21.8 billion, it stands head and shoulders over smaller quantum hopefuls such as Rigetti Computing (NASDAQ: RGTI) and D-Wave Quantum (NYSE: QBTS).

IonQ's focus on trapped ion systems is more natural than the superconducting gates used by Rigetti and D-Wave's quantum annealing. Its hardware is already producing high-quality data that can do useful things with less error correction. It's not a perfect solution, though; IonQ's data processing is also slower than the superconducting circuits and requires more precise engineering.

If IonQ's solutions can produce business-grade quantum computing systems before the others, you're looking at the early days of another durable tech titan.

IonQ's success is far from guaranteed

Unfortunately, IonQ has many hurdles to jump before reaching that lofty goal.

• What if superconducting circuits are the right long-term approach, making IonQ's research obsolete in five or 10 years? In this case, I'd rather own Rigetti and D-Wave stock.

• D-Wave and Rigetti may not look too dangerous today, but IonQ is also competing with well-heeled giants like Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL) and IBM (NYSE: IBM). IBM Quantum Computing and Google Quantum AI already have boatloads of technology patents, and their massive research budgets make IonQ and Rigetti look like rounding errors.

• And there are no guarantees that IonQ's quantum computing research efforts will succeed. The trapped ion approach makes sense today, but the company's scientists could run into unexpected roadblocks and failed experiments. Any experienced biotech or semiconductor investor can tell you scary tales of promising research projects leading to a dead end.

• Unfortunately, it will probably take many years to create truly useful quantum computers. If nothing else, IonQ may very well run out of cash long before the final breakthrough. From dilutive stock sales to expensive loans to all-out bankruptcy, none of the options is particularly shareholder-friendly.

The stock price lives in a different reality

Meanwhile, IonQ's stock is trading at nosebleed valuations. It's as if the company's long-term success were already guaranteed, with no regard at all for the many risks that remain.

So the greatest risk of all for IonQ investors may be the stock's unsustainable valuation. I already gave you the figures to work out its price-to-sales ratio -- a terrifying 415.5 times trailing revenue.

And I can't even talk about profit-based metrics, because IonQ isn't making money. Like, at all. With $52.4 million of trailing sales, the company reported a net loss of $464.3 million over the last four quarters. And it's not just a tax-savvy accounting move, either. IonQ's free cash flow was a negative $155.1 million in the same period.

The company is running its pricey research projects and burgeoning system manufacturing operations on a rapidly dwindling reserve of investor capital.

Bottom line: Wait for a better entry point

IonQ is at the forefront of a thrilling technological revolution, sure to create a new set of business giants and make millionaires out of early investors. That is, early investors in the eventual winners, which may or may not include IonQ.

I would consider buying a few IonQ shares if the stock weren't so incredibly expensive, but I'm not interested at all in the current setup -- even 26% below the even loftier mid-October peak. Give me a call if and when the market comes to its senses, accounting for IonQ's long-term risks in a much lower share price.

Until then, I can only hope the stock chart continues to trend lower for a while. I wouldn't dare short this volatile stock, of course -- it's all about finding a more reasonable entry point.

Anders Bylund has positions in Alphabet and International Business Machines. The Motley Fool has positions in and recommends Alphabet and International Business Machines. The Motley Fool has a disclosure policy.