Investment Thesis
IonQ (NYSE:IONQ) delivered a massive Q2 revenue beat. Indeed, it’s fair to say, that the leading quantum computing company delivered a strong set of results plus guidance.
But when all is considered, this is a story stock and not a viable business, at least not yet. Yes, there are very strong revenue growth rates. And yes, there’s more than enough capital on its balance sheet to support its vision. But nevertheless, this is a story stock and investors should keep this in mind when investing.
I have a buy rating on this stock, as I believe that IonQ has strong potential. But at the same time, I make ample references to the fact that this stock is beyond expensive. Therefore, proceed with caution.
Rapid Recap
In my previous bullish analysis, as we headed into Q2 earnings, I said,
IonQ is a leading company in the field of quantum computing, harnessing the power of quantum physics to revolutionize computation.
[…] On balance, I’m bullish on this stock, but I am mindful of its very hyped up valuation already.
[…] IonQ was growing its revenues at 10x growth rates, but looking ahead to Q2 of this year, its growth rates point to a comparatively paltry 68% y/y growth.
This has significant implications for investors. It means that if we presumed H1 2023 was growing at about 94% y/y and the whole of 2023 was expected to grow at 72% CAGR, this would mean that the second half of 2023 would see a significant amount of further deceleration.
Now we know IonQ’s Q2 results as well as its updated guidance. While my contention that H2 will see IonQ’s revenue growth rates decelerating further remains true, what turns out to be up for discussion is the pace of the deceleration, something we’ll soon in more detail.
Why IonQ? Why Now?
IonQ is a quantum computing company that focuses on developing and commercializing quantum computing hardware and software. IonQ utilizes trapped-ion technology, which involves using individual ions as quantum bits (qubits) to perform quantum computations.
Close followers of the company will recall that IonQ reached 29 algorithmic qubits (#AQ) seven months ahead of schedule and that it has partnered up with a large European customer, QuantumBasel, which validates the commercial aspirations of IonQ. Here’s a quote from the earnings call echoing this argument,
The beauty of this partnership is that as our first planned on-premise hardware project in Europe, we will retain some capacity on each system, allowing us to serve other prospective customers in the region from our new European datacenter. Our QuantumBasel partnership is significant to IonQ in a few ways. First, we noted in prior earnings calls that a large sale could create a significant boost in IonQ’s near-term bookings. This is such a sale. Additionally, this partnership represents our first deal involving future IonQ systems and is a strong third-party validation of IonQ’s ambitious technical roadmap.
In other words, there weren’t any ”massive” new developments in this earnings report that investors weren’t already vaguely aware of. So, this leads us to discuss its outlook and growth rates ahead.
How to Interpret H2 2023?
IONQ revenue growth rates
As discussed above, one aspect that has been weighing on the stock is the pace of IonQ’s deceleration into H2 2023. IonQ did raise the full guidance, but it raised it by $100K for the full year.
Put another way, there hasn’t been any meaningful raise for all intents and purposes.
That being said, keep in mind that back in Q1 2023, IonQ’s Q2 guidance provided together at the time was for approximately $4.5 million in revenues at the high end. And when IonQ finally reported its results, it delivered $5.5 million, or a 22% revenue beat.
What does this tell you? It tells you that management is being prudent with its guidance so that it can ”impress” investors with a positive quarterly surprise. The Street needs a constant drip of good news to keep the stock trading at the premium valuation that it presently trades for.
Nevertheless, one is forced to question, could it truly be the case that by Q4 2023 IonQ’s revenue growth rates are at sub 70% CAGR? Presently, IonQ’s Q4 guidance points to around $4.3 million. And that’s a steep decline in revenues from Q2 2023, which just reported $5.5 million. Why focus so intently on this discussion?
One could be dismissive of all these considerations, after all, bookings continue to increase at a rapid clip and right now are up nearly 130% y/y. This means that booking, a leading indicator of revenue growth rates, is still clearly growing faster than the full-year revenue guide of approximately 74% y/y, meaning that there’s still a very healthy pipeline of revenues to be recognized going forward.
However, the problem here, which is unavoidable, is that IonQ’s valuation leaves no room for ”investor disbelief” in this story.
IONQ Stock Valuation – Eye Watering
As it stands right now, IonQ is a story stock. Case in point, as a reference point, for every $1 of revenues that IonQ makes, it has about $4 worth of free cash flow burn. It’s not even $1 of revenues for every $2 of cash burn, it’s really an income statement that’s upside down.
Put another way, investors need to ”believe” and support a very high multiple on its valuation. IonQ is priced at about 90x next year’s revenues.
I’ve seen a lot of overvalued stocks in my time, and IonQ isn’t the most shocking. But it’s up there. And I’ve seen this movie before. The stock can end up working out well in the end, but few investors will have the stomach to stay the course through all the downs as well as the ups.
The way I describe this type of investment is as such. It’s a high-risk high-reward investment on the surface. But what often happens is that investors end up taking all the risk upfront, the stock will fall at some point, investors cling on to get back to breakeven, and let go.
I’m not advocating for buy and hold forever either, that works well for ”hindsight” investors, but I’m cautioning investors not to buy more of IonQ than they feel comfortable holding through the downs as well as the ups.
The Bottom Line
IonQ impressively surpasses Q2 revenue expectations, displaying a robust set of results and forward guidance.
While the company’s strong revenue growth rates and healthy balance sheet stand out, it’s important to recognize that IonQ remains a story stock rather than a fully matured business at this stage.
As I maintain a buy rating, I acknowledge IonQ’s potential while highlighting its premium valuation and the need for cautious investment.
In my previous analysis, I acknowledged the company’s leadership in quantum computing and its rapid growth rates, yet also emphasized the high valuation and potential deceleration in revenue growth. Despite a higher guidance raise for the full year, IonQ’s prudent guidance approach seems aimed at maintaining positive market sentiment.
With the spotlight on its outlook and growth trajectory, the company’s valuation demands strong investor belief. Currently trading at around 90x next year’s revenues, IonQ’s valuation is steep, demanding investors’ confidence and commitment.
While the stock can be rewarding, the risk of fluctuations and downturns is substantial. Investing in IonQ requires a balanced approach, cautiously considering its high-risk, high-reward nature.
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