IonQ: Don't Jump Blindfolded

As growth investors, it is perfectly normal for us to be enticed by the stories told by young companies that plan to disrupt the way a particular business sector functions. I pay close attention to these stories as I believe the first step to identifying multi-baggers is listening to the stories narrated by potentially disruptive companies. IonQ, Inc. (NYSE:IONQ), a company that specializes in quantum computing, has a great story to tell, and Mr. Market has rewarded this story by sending IONQ stock 315% higher since the beginning of this year. IonQ stock, however, is still trading substantially lower than the highs of around $30 registered in late 2021. IonQ's story, in my opinion, instantly makes it a company worth monitoring closely, but I am concerned about the path to monetizing this story.

The Business

IonQ specializes in quantum computing, a technology that uses the principles of quantum physics to perform complex calculations faster than traditional computers. IonQ was founded in 2015 by two professors, Christopher Monroe and Jungsang Kim, who have been researching trapped ion quantum computing for over 25 years. Trapped ion quantum computing involves manipulating individual atoms with lasers to create and control qubits, the basic units of quantum information. IonQ claims its trapped ion approach has several advantages over other quantum computing technologies, such as high fidelity, scalability, networkability, and algorithm optimization. The company has developed several quantum computers with up to 32 qubits and has made them available to the public through cloud platforms such as Amazon (AMZN) Braket, Microsoft (MSFT) Azure, Google (GOOG) (GOOGL) Cloud, and also through direct API access.

Exhibit 1: Business snapshot

The business strategy of the company is to develop the most powerful, efficient quantum computers and systems to surpass the computational powers of existing machines, thereby attracting large-scale clients.

2023 Booking Remains Robust

IonQ started the year with impressive strides, achieving remarkable milestones. A notable achievement for the company is the fulfillment of its 2023 technical target of 29 algorithmic qubits (#AQ), a remarkable feat accomplished seven months ahead of schedule. This achievement was made possible by IonQ Forte, the company's latest world-class quantum system, which represents a significant 16x increase in computational power compared to its predecessor, IonQ Aria. Forte's superior capabilities are already being leveraged by customers such as Airbus SE (OTCPK:EADSF), Hyundai Motor Company (OTCPK:HYMTF), and Los Alamos National Lab to explore quantum solutions for complex real-world problems.

Exhibit 2: Growth strategy

IonQ’s financial performance has trended in the right direction, with impressive revenue growth and new bookings. In the first quarter, the company recorded $4.3 million in revenue, exceeding the high end of management guidance, reflecting early activities for one of IonQ's customer contracts. New bookings for the same period amounted to $4.1 million, setting IonQ on a trajectory for over 100% growth in bookings compared to the previous year's record performance of $24.5 million. This strong momentum has prompted the company to increase its 2023 bookings expectations by 25% to a range of $45 million to $55 million.

To further expand its reach and capabilities, IonQ has strategically ventured into the European market with a significant commercial transaction worth 25 million CHF ($28 million). The deal involves the installation of two future quantum systems in Europe, including an anticipated #AQ 64 system, capable of considering over 18 quintillion different possibilities simultaneously. This move is expected to showcase quantum advantage over top-tier supercomputers across various applications, while also enabling IonQ to cater to its European clientele through a joint data center partnership.

As IonQ continues its rapid expansion to solidify its position as a leader in the quantum computing domain, the company is looking forward to delivering its first quantum system in Europe post-2023, further boosting its commercial presence. IonQ is focused on doubling bookings year-over-year in 2023 supported by strategic expansions into new markets.

IonQ Expands Global Quantum Leadership With Strategic Partnerships

In a significant step toward advancing quantum science and technology, IonQ has partnered with South Korea's Ministry of Science and ICT through the signing of a Memorandum of Understanding. The agreement, reached on June 27 at the prestigious Quantum Korea 2023 event in Seoul, solidifies the commitment of both parties to foster the growth of a local quantum ecosystem to support South Korea's burgeoning quantum computing industry.

As the world increasingly recognizes the potential of quantum computing to revolutionize various sectors, such as finance, healthcare, and materials science, South Korea's strategic partnership with IonQ comes at a critical juncture. South Korea's investment in quantum science and technology is nothing short of ambitious, with a commitment of over $2.3 billion by 2035. The government is determined to elevate the nation's standing in the quantum domain, aiming to increase its quantum technology advancement to 85% of the U.S. level by 2035, up from the current 62.5%. To achieve this, South Korea is embarking on key partnerships with leading industry players such as International Business Machines Corporation (IBM) and IonQ to cultivate a skilled quantum technology workforce. By boosting the number of doctoral quantum researchers from 384 to 2,500 this year and growing the quantum technology workforce with bachelor's and master's degrees from 1,000 to 10,000 during the same period, South Korea is laying a strong foundation for its quantum future.

The MOU between IonQ and South Korea's Ministry of Science and ICT aims to capitalize on IonQ's resources and expertise to implement an extensive education, training, and leadership expansion program within the country. This initiative seeks to nurture and empower quantum science and technology professionals, equipping them with the necessary skills and knowledge to excel in this transformative field, driving quantum progress and elevating South Korea's position in the global quantum landscape. At the Quantum Korea 2023 event, IonQ showcased its flagship quantum computer, IonQ Forte, renowned for its exceptional performance capabilities. The company also demonstrated its recent achievements in quantum machine learning, showcasing the practical applications and transformative impact of quantum technology across diverse industries.

IonQ recently expanded the commercial availability of IonQ Forte. After its initial release in 2022 with limited access to select partners, IonQ Forte is now accessible to customers worldwide, opening up new possibilities for solving today's most complex problems. With impressive features, including 32 physical qubits and a record algorithmic qubit count of #AQ 29, IonQ Forte is pushing the boundaries of quantum performance and enabling quantum applications at an unprecedented scale. This advanced quantum system is tailor-made for customers at the forefront of quantum research and applications, providing them with the computational power and performance required to tackle larger and more intricate problems. As part of IonQ's commitment to democratizing quantum computing, IonQ Forte complements the company’s existing world-class portfolio, which includes IonQ Harmony and IonQ Aria, making quantum accessible to a diverse range of users and projects.

Further, IonQ has teamed up with Switzerland-based QuantumBasel to establish a cutting-edge European quantum data center. The joint venture is set to bring two powerful quantum systems, #AQ 35 and #AQ 64, to the Center of Competence for Quantum & AI QuantumBasel, opening up a realm of possibilities for quantum computing applications across diverse sectors. With a shared vision of harnessing the potential of quantum computing to address the world's most complex challenges, both companies are optimistic about the transformative impact of this venture. The first system, #AQ 35, is expected to push the boundaries of quantum simulators on classical computers, while the second system, #AQ 64, is anticipated to outperform even the most powerful supercomputers through full quantum simulation. This advancement is set to pave the way for novel applications in fields such as logistics, finance, pharma, chemistry, and Artificial Intelligence. According to Statista's findings, organizations from various sectors are increasingly delving into the potential of quantum computing to address intricate optimization problems, with notable progress in the biopharma industry, accounting for a substantial 86% of interest. Quantum advancements in biopharma hold great promise in enhancing the drug discovery process and conducting complex in silico simulations. With IonQ's systems integrated into QuantumBasel's ecosystem, the journey toward more effective treatments for currently incurable diseases comes one step closer.

Exhibit 3: Use cases of quantum computing

The significance of the #AQ scale lies in its doubling of useful computational space for running quantum algorithms with each additional increment. At #AQ 35, the system can handle over 34 billion possibilities simultaneously, while at #AQ 64, it can handle an astonishing 18 quintillion possibilities simultaneously, unlocking unprecedented computational power for quantum applications.

By joining forces with QuantumBasel, IonQ gains access to a burgeoning quantum ecosystem at uptownBasel, Switzerland's first quantum hub for commercial use. Additionally, IonQ's establishment of a quantum innovation center in EMEA further reinforces its commitment to advancing quantum research and development. This center will serve as a hub for exploring next-generation quantum systems, fostering collaboration with researchers and industry experts across the region. Moreover, the joint data center with QuantumBasel enables IonQ to better serve its European customers, creating a cohesive network of quantum computing resources and expertise.

Continuing its expansion in the EMEA region, IonQ announced a new agreement with Abu Dhabi's Quantum Research Center - Technology Innovation Institute (QRC-TII) in the United Arab Emirates. This agreement marks a significant step in advancing the UAE's quantum computing industry and provides QRC-TII with access to IonQ's cutting-edge Aria quantum computer, considered one of the most powerful commercially available quantum systems in the world. This access empowers QRC-TII to test and execute quantum algorithms, addressing some of today's most complex challenges.

The UAE government has shown its dedication to the advancement of quantum computing by allocating significant resources to support QRC-TII's endeavors. QRC-TII is focused on developing improved quantum algorithms for commercially available quantum systems and the collaboration enables QRC-TII to explore quantum device characterization and quantum error mitigation techniques, further enhancing the accuracy and reliability of quantum algorithms.

IonQ's agreement with QRC-TII in the UAE is part of the company's broader international expansion efforts. In recent months, IonQ has been making significant strides in the global quantum landscape. In January, IonQ's acquisition of Canadian-based startup Entangled Networks bolstered its quantum networking expertise and led to the establishment of its first office in Canada. This move closely followed the founding of international business entities in Germany and Israel in the preceding year, extending IonQ's reach to a diverse range of European and Asian companies and governments.

Lack Of Clarity On Earnings Growth Calls For Caution

I am not bearish on the prospects for IonQ. On the contrary, I believe the company can strike gold by leveraging its existing business relationships to secure a leading place in the quantum computing market segment. I am comfortable with investing in young, high-growth companies that are years away from profitability. But, because of the substantial risks associated with investing in such businesses, I always try to avoid pitfalls by focusing on companies that are making progress toward backing their stories with numbers. When it comes to IonQ, I have three major concerns.

1. The company is still beginning to monetize its technology, meaning we have little revenue data to work with. I prefer to analyze revenue growth trends over time which is not possible with IonQ today.
2. Based on the way you look at it, IonQ could either be substantially undervalued or grossly overvalued today. However, with no financial data to work with, it is impossible to estimate the intrinsic value of the company today.
3. IonQ may have certain first-mover advantages, but because of the disruptive nature of the quantum computing industry, it is too early to predict whether the company will enjoy long-lasting competitive advantages.

I will continue looking for an inflection point from a financial performance perspective, but for now, I don't see any.

Takeaway

IonQ is heading in the right direction by focusing on improving the computational power of its quantum computing technology. Booking trends give me some confidence as well, but I feel as if I would be jumping blindfolded if I were to invest in IonQ stock today given that there is no clarity about the expected financial performance and long-term industry positioning of the company. For now, I feel more comfortable monitoring IonQ's progress from the sidelines than shooting in the dark in anticipation of a golden strike.

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