Quantum computing stocks have gone parabolic in the past few weeks, making them some of the best performers in Wall Street.
Rigetti Computing stock surged to a high of $19.38, up by 2,775% from its lowest level in November, bringing its market cap to over $3.92 billion.
Similarly, IONQ stock has soared by more than 580% from its year-to-date low, while Quantum Computing jumped by over 3,000%. Arqit Quantum has soared by over 1,000%.
This price action has helped turn these fledgling companies into multi-billion dollar entities. Rigetti has achieved a $3.9 billion valuation, while IONQ is approaching a market valuation of almost $10 billion.
Find more about the IONQ stock here.
Why quantum computing stocks surged
Before we look at why quantum computing stocks are soaring, we need to first explain what this technology is. Quantum computing is an approach that leverages quantum bits, also known as qubits, to handle solutions. They are different from classical computers that use bits as the smallest units of data. In this case, data in these computers is represented by 0 or 1.
Many analysts believe that quantum computers are the future because of what they can achieve. While today’s computers are incredibly fast, quantum ones can handle more data faster. Their applications are in the military, drug discovery, material science, and artificial intelligence.
Why quantum computing companies have soared
Quantum computing stocks have soared as Wall Street started to put focus on the industry this month. This focus was mostly triggered by Google, which unveiled Willow, its most advanced quantum chip.
The chip can reduce errors substantially as it scales up using more qubits, a notable quantum leap that has been in the works for decades. Further, Willow performed a complex mathematical calculation that takes today’s supercomputers 10 septillion years in just five minutes.
Google now hopes to continue innovating and translating Willow’s success into real-world applications. According to the statement, they hope that the quantum computers will be handle challenges that classical computers cannot do well.
Quantum computing companies have soared as investors consider the industry to be the next big thing after artificial intelligence. AI companies like NVIDIA and Broadcom have attained a market cap of over $1 trillion. Many others like Palantir Technologies, ASML, and Taiwan Semiconductors have become giants.
Valuation and technicals concerns remain
So, is it safe to buy the soaring quantum computing stocks? We see valuation and mean reversion concerns.
All data shows that these companies are all highly overvalued. For example, IONQ has achieved a $9 billion market cap despite generating just $37.5 million in revenue in the trailing twelve months. That gives it a price-to-sales ratio of 253.3, which is significantly higher than other companies.
Similarly, Rigetti Computing has received a $3 billion valuation against TTM sales of just $12 million. Other companies in the industry have seen a similar valuation discrepancy.
To some extent, these companies valuations would be justified if they have strong growth metrics. However, not all of them are growing. For example, Rigetti Computing’s annual revenue dropped from $13.1 million in 2022 to $12 million last year.
While IONQ is growing, its revenue figures show that it is still a fairly small company. Its revenue grew from $11 million in 2022 to over $22 million in 2023. Analysts expect that it will get to the $50 million mark in 2026.
The other main reason why these stocks may retreat is based on technicals. The first technical concept is known as the Wyckoff Method, which looks at four stages that stocks go through: accumulation, markup, distribution, and markdown. The recent surge is part of the markup phase and it will be followed by the distribution and markdown, leading to a strong plunge.
The other concept is known as mean reversion. This is a concept where financial assets usually drop back to their historical averages. In this case, as shown above, IONQ stock is 45% and 90% above the 50-day and 100-day moving averages. As such, the concep of mean reversion means that it will pull back and move to these averages.
Therefore, there is a risk of investing in these quantum computing stocks will retreat in the next few weeks.
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