Could a Quantum Computing Bubble Be About to Pop? History Offers a Clear Answer todayheadline

Last summer, companies such as IonQ (IONQ -1.80%), Rigetti Computing (RGTI -3.29%), D-Wave Quantum (QBTS -4.45%), and Quantum Computing (QUBT -1.42%) were unknown penny stocks.

However, as quantum computing steadily made its way toward center stage in the artificial intelligence (AI) realm, each of these companies witnessed meteoric rises in their share prices. Over the last 12 months, IonQ stock has blasted higher by 517%, while Rigetti, D-Wave, and Quantum Computing have experienced surges of at least 1,500% as of this writing (July 21).

With valuations reaching historically high levels, could investors be on the verge of witnessing a quantum computing bubble bursting?

Is quantum computing in a bubble?

The chart below illustrates valuation trends among popular quantum computing stocks on a price-to-sales (P/S) basis.

IONQ PS Ratio data by YCharts.

As I outlined in a prior article, the quantum computing stocks above are trading at far higher P/S multiples compared to levels seen during the dot-com and COVID-19 stock bubbles.

For example, during the internet boom in the late 1990s, stocks such as Amazon, Cisco, and Microsoft experienced peak P/S ratios in the range of 30x and 40x. Taking this a step further, popular COVID stocks such as Zoom Communications and Peloton saw P/S multiples top out at 124x and 20x, respectively.

The big theme here is that IonQ, Rigetti, D-Wave, and Quantum Computing are each trading for valuation multiples that could be seen as historically high, even when compared to prior bubble events.

With that said, other AI companies that are also exploring quantum computing — such as Nvidia, Amazon, Alphabet, and Microsoft — currently trade for much more reasonable valuation multiples when compared to the companies in the chart above.

For this reason, I do not think the entire quantum computing landscape is at risk of experiencing a bubble-bursting event. However, IonQ and its peers have been dropping some breadcrumbs in recent months that lead me to think the smaller quantum computing players could be on the verge of a harsh sell-off.

Image source: Getty Images.

What’s going on under the hood with quantum computing stocks?

After some digging into certain filings with the Securities and Exchange Commission (SEC), I think IonQ, Rigetti, D-Wave, and Quantum Computing may be trying to signal some important things to investors:

What’s really going on here? With each of these quantum computing stocks trading near all-time highs, it appears to me that management is looking to take advantage of frothy market conditions.

IONQ data by YCharts.

Quantum computing is a research-heavy, capital-intensive industry. Management at IonQ and its peers surely understand this, and so I see these capital raises as a calculated move to capitalize on inflated, overstretched valuations.

Should you invest in quantum computing stocks?

To me, any hint of a bubble surrounding IonQ and its smaller peers may already be in the process of bursting. Under the surface, the various stock issuances and equity offerings annotated above could suggest that management does not believe current price levels are sustainable.

By using the dot-com and COVID bubbles as benchmarks, history would suggest that a major correction could be on the horizon for these small quantum computing stocks. Issuing stock to raise funds is not sustainable in the long run. Furthermore, consistently diluting shareholders through these offerings could call into question how these companies are allocating capital.

In my eyes, if investors are seeking exposure to the quantum computing industry, they are best off exploring more diversified opportunities in big tech as opposed to the smaller, more speculative players analyzed in this piece.