IonQ Inc (IONQ) - Investment Thesis

IonQ Inc. (IONQ): A Deep Dive into a Quantum Computing Pioneer

                               

                                 IonQ says its 100,000-square-foot Bothell factory is the first dedicated quantum 

                                        computer manufacturing facility in the U.S. 

The world of computing is on the cusp of a revolutionary shift, and at the forefront of this transformation stands IonQ, Inc. (NYSE: IONQ). This Maryland-based company, founded in 2015 and publicly listed in October 2021, is a leading developer of general-purpose trapped ion quantum computers. IonQ is not just building hardware; it's making quantum computing accessible, offering access to its cutting-edge machines through major cloud platforms like Amazon Web Services (AWS), Microsoft's Azure Quantum, and Google Cloud, as well as its own dedicated cloud service.

Technical Prowess: The Power of Trapped Ions

IonQ's current generation quantum computer, IonQ Forte, boasts an impressive 36 algorithmic qubits. What sets IonQ apart is its pioneering use of trapped ion technology. Unlike some competitors that require cryogenic temperatures, IonQ proudly states, "We run at room temperature." This is achieved through a sophisticated technique called Laser Doppler Cooling, where individual atoms are surrounded by precisely tuned lasers. As atoms move towards the lasers, the light is blue-shifted, causing the atoms to absorb the light and slow their motion, effectively cooling them.

This trapped ion approach offers several distinct advantages:

• High Fidelity: IonQ has demonstrated remarkable breakthroughs, including achieving 99.9% fidelity on two-qubit gates using barium ions. This high precision is crucial for performing complex quantum calculations with minimal errors.
• Long Coherence Times: Trapped ion systems generally exhibit longer coherence times (the duration a qubit can maintain its quantum state) compared to other technologies. This allows for longer and more complex quantum algorithms to be executed.
• Complete Connectivity: In IonQ's trapped ion systems, any pair of qubits can interact directly in a single operation, simplifying algorithm design and reducing error accumulation often seen in systems with limited connectivity.
• Identical Qubits: By utilizing actual atoms as qubits, IonQ ensures inherent perfection and identical properties for each qubit, simplifying calibration and tuning as the systems scale.
• Scalability: IonQ is actively exploring quantum networking with photonic interconnects, which promises modular expansion of their systems, potentially scaling to hundreds or thousands of qubits more efficiently.

Reasons to Consider an Investment in IonQ:

1. Significant Government and Industry Contracts: IonQ has secured substantial contracts, underscoring the growing demand for its quantum solutions. A notable example is the $54.5 million contract awarded by the U.S. Air Force Research Lab (announced September 27, 2024), focusing on advancing quantum networking and national security applications. Beyond government, IonQ has garnered prominent clients across diverse sectors:

   • Hyundai: Collaborating on the development of self-driving cars.
   • Airbus: Working on optimizing cargo logistics.
   • Oak Ridge National Laboratory: Exploring the use of quantum computers to improve the U.S. power grid.
   • University of Maryland: A $9 million deal to provide state-of-the-art quantum computing access, further solidifying its academic and research ties.

2. Impressive Revenue Growth: Since going public, IonQ has demonstrated robust financial performance, nearly doubling its revenue each year. For the full year 2024, IonQ recognized revenue of $43.1 million, representing a 95% annual growth compared to the prior year. The company is projecting strong continued growth, with an outlook of $75 million to $95 million in revenue for the full year 2025. This consistent growth indicates increasing adoption and commercial traction for its quantum computing services.

3. Technological Leadership and Innovation: Beyond fidelity improvements, IonQ has achieved significant milestones, including demonstrating ion-photon entanglement for commercial use and ion-ion entanglement. These advancements are critical steps toward building powerful, interconnected quantum systems. The company's focus on barium ions and photonic interconnects suggests a clear roadmap for continued innovation and performance enhancements.

4. Positive Earnings Trend (Mann-Kendall Test): While still unprofitable, a statistical analysis of IonQ's quarterly earnings per share (EPS) reveals a positive trend. The Mann-Kendall Trend Test performed on the last 20 quarters of reported EPS, [-0.24, -0.18, -0.19, -0.2, -0.22, -0.22, -0.14, -0.09, -0.12, -0.01, -0.09, -0.06, -0.09, -0.08, -0.04, 0.0], yields:

   • Tau (trend strength): 0.6833
   • p-value: 0.000248 This indicates a statistically significant increasing trend in earnings, suggesting that the company is moving in the right direction towards profitability, even amidst continued investments.

Considerations Against Buying:

While IonQ presents a compelling vision, potential investors should also consider the following concerns, some of which have been highlighted in a report by Kerrisdale Capital:

1. Unprofitability and Financial Concerns: IonQ is still operating at a net loss despite rising revenue. For the full year 2024, IonQ reported a net loss of $331.6 million and an Adjusted EBITDA loss of $107.2 million. The company projects continued Adjusted EBITDA losses for 2025, reflecting ongoing high R&D and expansion costs. The Kerrisdale report characterizes IonQ as a "cash-burning" company, questioning the necessity of recent equity offerings given prior assurances of sufficient funding.

2. Overvaluation and Hype: The Kerrisdale report argues that IonQ's stock may be significantly overvalued, trading at a high multiple of future revenue, potentially fueled by speculative retail investor interest in quantum computing. The report suggests that IonQ is a "highly promotional company" that may prioritize hype over genuine technological leadership.

3. Scaling Challenges and Technology Obfuscation: A major concern revolves around IonQ's ability to effectively scale its quantum computing systems. The company's reliance on photonic interconnects to link computing modules is questioned, with the Kerrisdale report citing expert opinions that this technology is currently slow and inefficient, suggesting IonQ is far from successfully deploying it. The report also criticizes IonQ for a lack of transparency regarding the development of these interconnects and for changes to its technology roadmap, including the discontinuation of algorithmic qubits as a benchmark, which could be seen as an attempt to obscure technical difficulties.

4. Lack of Transparency and Questionable Leadership: The report points to a history of bold claims from former CEO Peter Chapman that, according to Kerrisdale, did not materialize. This raises concerns about the company's communication and the reliability of its projections.

5. Competitive Disadvantages and Unreliable Access: IonQ, while a pioneer, faces formidable competition from larger tech giants like Microsoft and Google, who possess significantly greater financial and engineering resources. The Kerrisdale report also suggests that IonQ may not be the clear leader even within the ion trap quantum computing space. Furthermore, a concern raised by an IonQ partner is the unreliability of access to IonQ's quantum computers on platforms like AWS Bracket, where the machines are reportedly more frequently offline than others.

6. Customer Concentration: Historically, a significant portion of IonQ's revenue has been concentrated among a limited number of partners, which could pose a risk to revenue stability if any of these key relationships change.

Conclusion:

IonQ stands as a compelling investment opportunity in the burgeoning quantum computing sector, particularly for investors with a high-risk tolerance and a long-term outlook. Its proprietary trapped ion technology offers distinct performance advantages, and the company has demonstrated strong commercial momentum through significant contracts and consistent revenue growth. The statistically significant improving earnings trend also suggests a positive trajectory.

However, a thorough evaluation necessitates acknowledging the substantial risks. The company's ongoing unprofitability, coupled with concerns about overvaluation, scaling challenges, transparency, and intense competition, demand careful consideration. While IonQ possesses the potential to be a transformative force in the future of computing, investors should weigh the significant upside against the inherent challenges and uncertainties of investing in a nascent, capital-intensive industry. Continued monitoring of its technological advancements, financial performance, and ability to address scaling and transparency concerns will be crucial.

Source: IonQ – Kerrisdale Capital Report