Is IonQ Stock a Buy?

IonQ (NYSE: IONQ) has taken its investors on a wild ride over the past three years. The quantum computing startup went public by merging with a special purpose acquisition company (SPAC) on Oct. 1, 2021, and its stock opened at $10.60 on the first day. It soared as high as $31 the following month but sank to about $3 by December 2022.

Like many other SPAC-backed startups, IonQ disappointed its investors by missing its premerger targets and racked up steep losses. The departure of its cofounder and chief scientist and troubling allegations from a prolific short-seller raised more red flags.

Image source: Getty Images.

But today, IonQ trades at a record high of nearly $33. A $10,000 investment at its all-time low two years ago would be worth about $110,000 today. Let's see why IonQ bounced back and whether its stock is still worth chasing after that massive rally.

What does IonQ do?

Traditional computers store data in binary bits of zeros and ones. Quantum computers store zeros and ones simultaneously in "qubits" to process more data at a faster rate, but those systems are much larger and pricier than regular servers. Furthermore, quantum computers tend to output more errors than binary computers.

To address those challenges, IonQ is developing a "trapped ion" technology that can shrink the average width of a quantum process unit from a few feet to a few inches. That miniaturization process could make its quantum computers much smaller, cheaper, and more accurate in the future.

IonQ mainly serves big government customers, including the U.S. Air Force Research Lab, and major universities. It sells three main products: its top-tier Aria quantum system, its commercial-oriented Forte system, and its on-premise Forte Enterprise system. It also serves up its own quantum computing power as a cloud-based service for customers who don't want to install on-site systems.

How fast is IonQ growing?

Companies that go public through traditional IPOs aren't allowed to set long-term revenue and earnings forecasts in their S-1 filings. However, companies that go public by merging with SPACs are allowed to provide long-term estimates.

As a result, many SPAC-backed companies overpromised and underdelivered. IonQ was one such company that missed its pre-merger expectations from 2021 to 2023.

Data source: IonQ.

That slower-than-expected growth, along with its persistent losses, short-seller questions about its miniaturization capabilities, and the departure of its chief scientist, Dr. Chris Monroe, who had developed the trapped-ion process, drove away its investors. Rising interest rates exacerbated that pressure by popping its bubbly valuations.

Why did IonQ's stock soar?

Yet three catalysts drove IonQ's stock higher over the past year. First, it signed several major deals, including a $54.5 million contract with the U.S. Air Force Research Lab. It also signed an agreement with the South Korean government to cultivate the development of its quantum computing market.

Second, it increased its exposure to the booming AI market by partnering with the generative AI specialist Zapata Computing, using Nvidia's CUDA-Q platform for quantum computing services, and testing out large language models on its own platform. Therefore, IonQ could simultaneously profit from the growth of the quantum computing and AI markets.

Lastly, IonQ repeatedly raised its guidance. At the end of 2023, it expected its revenue to rise 9% to 21%. But by the end of the third quarter of 2024, it had boosted that outlook to 13%-25% growth. It also recently agreed to acquire Qubitekk, a developer of quantum networking products, to further expand its ecosystem.

From 2023 to 2026, analysts expect its revenue to grow at a stunning compound annual growth rate of 89% to $148 million as the quantum computing market expands. The upcoming launch of its next-gen Tempo quantum computing system in 2025 could draw in more partners and customers while pacifying its critics.

But is it the right time to buy IonQ's stock?

IonQ still has plenty of irons in the fire, but it looks incredibly expensive at 168 times this year's sales, 84 times its 2025 sales, and 47 times its 2026 sales. It's also increased its number of outstanding shares by about 12% since its SPAC merger.

If IonQ fails to live up to those sky-high valuations, its stock could easily sink to the single digits again. It might be an interesting play for speculative investors right now, but I wouldn't buy it unless its valuations cool off a bit.

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Leo Sun has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Nvidia. The Motley Fool has a disclosure policy.