Is IonQ Stock a No-Brainer Buy? Here's What History Says.

In many respects, IonQ (NYSE: IONQ) looks like an intriguing investment. The potential for growth in the quantum computing industry naturally draws a lot of interest, and the company's approach to the technology holds the potential to define the industry.

There are numerous companies attempting to develop quantum computers, and they're using an array of disparate technologies to create the qubits (quantum bits) that sit at the heart of all such systems.

IonQ uses trapped-ion technology, meaning every qubit is created using a single charged ytterbium atom, held tightly in place using electromagnetic forces and manipulated using lasers. Those ions can be held in a stable quantum state for a relatively long period, so that approach seems to have given IonQ an advantage over other platforms.

Moreover, its all-to-all connectivity allows all qubits within an ecosystem to communicate with each other regardless of location. In contrast, other systems require the qubits to be next to one another to interact directly with each other.

However, potential does not necessarily translate into long-term success for quantum computing stocks.

One way to gauge how likely it is that IonQ will ultimately succeed is to take a look at history -- specifically, the history of other start-up companies in past emerging industries. And based on that history, there are good reasons to think IonQ is not a no-brainer buy.

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History and IonQ's financials

Given the potential of IonQ's technology and the buzz about the possibilities of quantum computing in general, investors might forget that this company is a start-up. This comes with numerous disadvantages.

The most obvious challenge is its dependence on its technology. Although trapped-ion qubit technology and all-to-all connectivity are competitive advantages, buying IonQ stock is basically an all-in bet that it can succeed with those technologies.

Another major hurdle is the company's financials. In the first quarter, it reported $65 million in revenue and $272 million in operating losses. This means it depends on outside capital to stay in business.

Thanks to prior capital raises, it holds just over $2 billion in liquidity, which should sustain it through a couple more years of losses. IonQ has not taken on significant debt; it raised capital by issuing more shares. In the last year alone, IonQ's outstanding share count rose by 15%, significantly diluting its prior shareholders.

From a historical standpoint, this approach is not unusual. If the company's financial situation improves, it could bolster a stock price that has risen by more than 220% since its 2021 IPO. However, history also shows that such start-ups can fall into penny-stock status if they have trouble raising money and cannot turn profitable.

Competing with other companies

Worse, it has to stand out from other quantum computing pure plays such as Rigetti Computing and D-Wave Quantum, which employ their own unique approaches to the technology in hopes of gaining a competitive advantage. From today's investor perspective, it is unclear if IonQ or any of these companies will become industry leaders.

Additionally, it competes with established tech giants such as Alphabet and IBM, which are pursuing their own projects in the quantum computing space. These companies have plenty of money to dedicate to R&D, and could potentially buy or replicate IonQ's technology if they wanted to. Similar situations boded poorly for many small companies during the internet boom.

Nonetheless, companies like IonQ are taking unusual approaches to this speculative new technology, and small nimble start-ups can display more openness to innovation than large established companies. The internet boom gave the world examples of well-established companies that failed to seize the opportunities in front of them.

Jeff Bezos founded Amazon in 1994, the year after Sears shut down its catalog business rather than moving it online. Lucent Technologies was originally Bell Labs, the innovation arm of the original AT&T. Despite its supposed advantages, Lucent failed to develop the Internet Protocol (IP) technology that spawned the growth of Cisco. Consequently, Alcatel (which Nokia later bought) acquired what was left of the one-time innovation leader.

Unfortunately for IonQ, both Alphabet and IBM have invested heavily in quantum computing technologies. Hence, they are much less likely to become the Sears or Lucent of this new tech industry.

Still, neither tech giant is pursuing trapped-ion qubit technology. If that approach leads to a more consistent and less error-prone performance than Alphabet's or IBM's superconducting qubits, IonQ could make investors a fortune.

History and IonQ stock

Ultimately, looking at the history of companies that were once in similar positions to the one IonQ occupies today reveals why it's far from a no-brainer buy. Investors who want to add it to their portfolios should treat it as a speculative investment, and size their positions accordingly.

Yes, it has potential, if everything goes right. Unfortunately, companies that consistently report massive losses and depend too heavily on outside capital can run out of time for things to go right. Such conditions likely mean that IonQ's technology will really have to stand out above the rival offerings of both the large tech sector incumbents and the many other start-ups for the company to succeed.

Although IonQ uses an approach that could redefine its industry, Alphabet, IBM, and a host of other players have also invested heavily in quantum computing. If they match or outperform IonQ's technology, IonQ may struggle to survive. As such, investors should approach this stock cautiously.

Will Healy has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet, Amazon, Cisco Systems, International Business Machines, and IonQ. The Motley Fool has a disclosure policy.