Popular quantum computing stocks Rigetti, IonQ, and D-Wave could face a reckoning next year.
The S&P 500 (^GSPC +0.54%) dropped 5% from its high in early November as elevated valuations raised concerns about a stock market bubble, particularly among technology companies involved with artificial intelligence (AI).
Admittedly, the entire stock market is expensive by historical standards, meaning AI has probably created a bubble to some extent. However, the size of the bubble is debatable. AI could have a truly profound impact on the economy within a few years, which could justify much of the enthusiasm seen in the market today.
The same cannot be said for quantum computing. Some experts believe the technology will not be useful to most enterprises for at least a decade, yet several quantum stocks achieved outrageous returns in the last three years, leaving their valuations in bubble territory.
- Rigetti Computing (RGTI +0.04%) shares advanced 1,720%.
- IonQ (IONQ +5.12%) shares advanced 855%.
- D-Wave Quantum (QBTS +1.16%) shares advanced 794%.
Here’s what investors should know about quantum computing, and why I think the bubble will burst next year.
Image source: Getty Images.
Quantum computing will be revolutionary, but the technology is still in its infancy
Classical computers use binary digits (i.e., bits) to represent information and perform calculations. Bits only come in two values: 0 and 1. Comparatively, quantum computers use quantum bits (i.e., qubits) to perform calculations, and they behave quite differently.
Qubits can exist in states of superposition, meaning they can be a combination of 0s and 1s simultaneously. Qubits can also be entangled, meaning the state of one can be linked to the state of another regardless of distance. Finally, qubits can interfere with one another in both good (constructive) and bad (destructive) ways.
Those properties let quantum processors perform calculations that would be impossible or impractical with classical computers. Quantum systems are particularly good at solving optimization and simulation problems, which could revolutionize drug discovery, materials science, finance, cybersecurity, supply chain management, and artificial intelligence.
Quantum processors can be created in different ways. IonQ manipulates trapped ions with lasers to create qubits. Other companies, such as D-Wave, Rigetti, Alphabet, and IBM, run electrons through superconducting loops. Each approach has benefits and drawbacks, but every modality struggles with qubit stability to some degree.
Temperature changes, mechanical vibrations, electromagnetic radiation, and other types of environmental noise can cause qubits to lose their quantum states. That phenomenon, known as decoherence, leads to high error rates. No company has yet managed to create a fault-tolerant quantum system on a large scale, though IBM hopes to accomplish that by 2029.
Rigetti, IonQ, and D-Wave trade at absurd valuations and have diluted shareholders
Grand View Research estimates quantum computing revenue will total $4 billion in 2030. Comparatively, AI revenue is forecast to reach $390 billion in 2025. That means companies will spend nearly 100 times more on AI this year than what they could spend on quantum computing in five years.
Industry experts have made similar projections. Earlier this year, Nvidia CEO Jensen Huang said “very useful” quantum computers are probably about two decades away. Around the same time, Alphabet CEO Sundar Pichai said “practically useful” quantum computers are at least five to 10 years away, and he compared the technology to where AI was in the 2010s.
Assuming Pichai is correct, buying shares of pure-play quantum stocks like IonQ, D-Wave, and Rigetti would be like buying shares of Nvidia circa 2015. But the valuations are entirely different. Whereas Nvidia traded around 3 times sales in 2015, the least expensive of those three quantum stocks is IonQ at 145 times sales. D-Wave and Rigetti have price-to-sales ratios of 270 and 980, respectively.
Meanwhile, all three companies have capitalized on their soaring stock prices by issuing more shares to raise cash, diluting investors in the process. Over the last three years, D-Wave inflated its share count by 209%, Rigetti inflated its share count by 164%, and IonQ inflated its share count by 77%. Comparatively, Nvidia’s share count increased just 9% during the 2010s.
Here is the bottom line: Quantum computing will undoubtedly revolutionize some industries, but many experts think those breakthroughs are at least a decade away. Yet, popular pure-play quantum stocks IonQ, D-Wave, and Rigetti trade at outrageously expensive valuations, they have diluted shareholders at an alarming pace, and none of them are guaranteed winners in the industry.
Investors will have to reckon with those issues eventually. Given that the market is already on edge about valuations, I think that reckoning will come sooner rather than later. That’s why I expect the quantum computing bubble to implode in 2026.