Forget AI: These 3 Quantum Stocks Could Leap in 2025

Forget AI for a moment — quantum computing stocks are the latest to soar.

Dec 18, 2024

Quantum computing’s applications could include designing nuclear fusion reactors, improving drug development for pharmaceutical companies and developing better car batteries;
The Defiance Quantum ETF gained 4.54% in the week of December 9; the fund is up 53.09%% in the year through December 16;
Due to the early stage of their development, most quantum computing companies are not yet profitable; Google’s Willow is not expected to be commercially viable before the end of the decade.

Introduction

Alphabet’s [GOOGL] Google sparked excitement in early December when it unveiled its quantum chip Willow, which, it claims, can take five minutes to solve a calculation that would take today’s most powerful computers 10 septillion years.^[1]

“We achieved an exponential reduction in the error rate,” wrote Hartmut Neven, Google Vice President of Engineering, in the blog post detailing the science behind the test results.

Neven explained to the BBC that quantum computing’s applications will include designing nuclear fusion reactors, improving drug development for pharmaceutical companies and developing better car batteries.^[2]

The catch is that it is unlikely that Willow will be used in a commercial application before the end of the decade, he added.

Once commercially viable, however, quantum computing is set for a major boom. McKinsey forecasts that quantum computing will generate up to $2trn in economic value in the chemicals, life sciences, finance and mobility industries by 2035.

This has not stopped investors from piling into the quantum computing theme. The Defiance Quantum ETF [QTUM] gained 4.54% in the week of December 9; the fund is up 53.09%% in the year through December 16.

Here, we explore the top three holdings of the Defiance Quantum ETF, which are arguably the biggest quantum computing companies around. This is what you should know about the technology the companies are developing, their prospects and the risk involved.

Three Stocks, Three Quantum Plays

The Quantum Computing-as-a-Service Stock

D-Wave [QBTS] is one of the oldest and most established companies in the quantum computing industry. It went public via a SPAC merger in August 2022.

“Organizations around the world are recognizing the value our technology can bring right now in fueling new discoveries, facilitating operational excellence and driving measurable outcomes,” said D-Wave CEO Alan Baratz in the Q3 2024 earnings release.^[3]

The company reported a 27% decline in quarterly revenue to $1.9m for the three months to September 30. However, revenue from its quantum computing-as-a-service (QCaaS) segment grew 41% to $1.6m, “principally due to a higher average revenue per customer for D-Wave’s QCaaS subscription services”.

The Patent Library Stock

IonQ [IONQ] was founded in 2015 and became the first publicly traded pure-play quantum computing stock when it merged with a SPAC in October 2021. The company’s technology is built on ‘trapped ion’ systems, where ions are isolated and lasers are used to control their quantum state.

In November, five new patents were granted, one of which “recognizes IonQ’s unique method for controlling the individual laser beams that are trapping its ion”.^[4]

The company will also acquire 118 more patents when it completes the buyout of quantum networking start-up Qubitekk, taking its library of granted and pending patents to more than 600 in total.

The Full-Stack Technology Stock

Rigetti Computing [RGTI] was founded in 2013 by former IBM [IBM] researcher Chad Rigetti. The company describes itself as “a pioneer in full-stack quantum-classical computing”. It also operates a cloud services platform that provides access to quantum processors over the cloud. Like D-Wave and IonQ, it went public via a SPAC merger, in March 2022.

On December 10, Rigetti, Nvidia [NVDA] and Quantum Machines announced they had successfully used artificial intelligence to automate the calibration of a quantum computer — “work that can require weeks of manual tuning by a skilled engineering team”, according to Rigetti Chief Technology Officer David Rivas.^[5]

Quantum Computing’s Astronomical Rise

All three stocks have taken a quantum leap this year. IonQ’s share price is the smallest gainer, rising 237.45% in the year to date; D-Wave’s share price is up 721.59% and Rigetti’s share price has surged 751.52%.

D-Wave and Rigetti faced being delisted from the NYSE in October after their share prices fell below $1 for more than 30 days. Both regained listing compliance in November.^[6]

Hype and Hope

Despite the astronomical gains, the fundamentals show companies whose businesses are not yet profitable and whose stocks are being fueled by hype and the hope that they will eventually come good. There are arguably big question marks over whether they should be able to command the valuations they currently do.

Quantum Computing: The Investment Case

The Investment Case for D-Wave

The Bull Case

D-Wave’s revenue from government clients increased 66% year-over-year in Q3. This could accelerate following the company’s annealing technology being recognized by the US Department of Defense and added to its Tradewinds procurement platform.^[7]

D-Wave bolstered its financial position on December 12 with the completion of a $175m equity offering, the proceeds of which will be used to advance the development of its annealing technology. Cash reserves should be at least $160m at the end of the year.^[8]

The Bear Case

D-Wave bears would argue that this equity issuance is a concern, given that the stock is currently trading at a valuation of 132.93 times forecast sales for 2025 and remains unprofitable.

The Investment Case for IonQ

The Bull Case

IonQ bulls would point towards the 102% year-over-year revenue growth to $12.4m reported for Q3, as well as the fact that IonQ ended the quarter with $63.5m in new bookings.^[9]

The major contract win in Q3 was a $54.5m four-year agreement with the US Air Force Research Lab to make quantum computing compatible with telecoms infrastructure. This is the largest US quantum computing deal this year.

The Bear Case

The major concern from the bears’ perspective would be that IonQ will have to sign a lot more contracts to start to break even.

IonQ’s net loss widened from $37.6m in Q2^[10] to $52.5m in Q3. The accumulated deficit is $481.72m as of September 30.^[11]

The Investment Case for Rigetti Computing

The Bull Case

Riggetti ended Q3 with $92.6m in cash and cash equivalents.^[12] It strengthened its position in November with a $100m equity offering.

The company should now have sufficient funds to support operations through to the end of 2026, according to a press release.^[13]

The Bear Case

Despite recent technological advancements, Rigetti only brought in $2.4m in revenue in Q3, down from $3.1m in Q2.[14]

There might be excitement around its potential to generate revenue in the future, but the current lack of income makes its current forward P/S ratio an eye-watering 168.35.[15]

And, as in the case of D-Wave, bears would argue that the equity issuance dilutes shareholders who are already paying a premium for the stock.

Conclusion

Google’s Willow news has stoked excitement about quantum computing. This piece has put a spotlight on the stocks that investors could consider if they want to gain exposure to the technology.

However, investors also need to be aware of the risks. The reality is that D-Wave, IonQ and Rigetti are unprofitable, generate low revenue, continue to burn through cash and are trading at very high multiples of their forward sales.

^[1] https://blog.google/technology/research/google-willow-quantum-chip/

^[2] https://www.bbc.co.uk/news/articles/c791ng0zvl3o

^[3] https://www.dwavesys.com/company/newsroom/press-release/d-wave-reports-third-quarter-2024-results/

^[4] https://ionq.com/news/ionq-strengthens-technical-moat-with-its-latest-series-of-issued-patents

^[5] https://investors.rigetti.com/news-releases/news-release-details/quantum-machines-and-rigetti-announce-successful-ai-powered

^[6] https://www.datacenterdynamics.com/en/news/quantum-computing-firms-rigetti-and-d-wave-regain-stock-exchange-listing-compliance-again/

^[7] https://www.dwavesys.com/company/newsroom/press-release/d-wave-deemed-awardable-vendor-for-us-department-of-defense-chief-digital-and-artificial-intelligence-office-s-tradewinds-solutions-marketplace/

^[8] https://ir.dwavesys.com/news/news-details/2024/D-Wave-Announces-Successful-Completion-of-175-Million-At-the-Market-Equity-Offerings/default.aspx

^[9] https://investors.ionq.com/news/news-details/2024/IonQ-Announces-Third-Quarter-2024-Financial-Results/

^[10] https://investors.ionq.com/news/news-details/2024/IonQ-Announces-Second-Quarter-2024-Financial-Results/default.aspx

^[11] https://s28.q4cdn.com/828571518/files/doc_financials/2024/q3/c078fa5a-edf6-48ef-a95f-810df02260f7.pdf

^[12] https://investors.rigetti.com/news-releases/news-release-details/rigetti-computing-reports-third-quarter-2024-financial-results