Over the last few months, a new theme has emerged in the artificial intelligence (AI) realm. A technology known as quantum computing has sparked a lot of enthusiasm from investors, and several companies have witnessed outsized gains in their stock prices.
One such company, aptly called Quantum Computing (QUBT -0.16%), has recently come into the spotlight -- just in the last three months, shares have soared by 2,400%. Although quantum mechanics represents an exciting new pocket in the AI landscape, I have some major questions about Quantum Computing's business.
Let's explore Quantum Computing's business together, and assess if the company is on the verge of leading AI's next big megatrend or if the stock should be avoided for now.
NASDAQ: QUBT
Key Data Points
Quantum Computing's interesting history
It's pretty rare for a stock price to rise to the degree that Quantum Computing's has during a short time period. Moreover, it's even more rare if the company in question is relatively unknown -- which is the case with Quantum Computing. After digging through some filings on the Securities and Exchange Commission's (SEC) website, I think my suspicions over Quantum Computing are valid.
Per the filings, Quantum Computing was founded in 2001 under the name Ticketcart. Ticketcart was originally focused on selling ink-jet cartridges for printers manufactured by Canon and Hewlett Packard. In 2007, Ticketcart pivoted its business after it acquired Innovative Beverage Group and subsequently changed its name to Innovative Beverage Group Holdings (IBGH). As the name implies, IBGH focused on beverage distribution.
By 2013, IBGH had gone out of business and was later sued by a prominent shareholder alleging that management "allowed the Company's assets to be wasted".
After the legal turbulence settled, IBGH essentially pivoted (once again) and rebranded itself as Quantum Computing Inc. back in 2018.
To be fair, even the largest companies in the world find themselves at the centers of lawsuits from time to time. However, such cases usually involve allegations over intellectual property (IP) or adjacent matters.
Pivoting from one idea to another doesn't inspire confidence in me, and I find IBGH changing its name to Quantum Computing to be eerily similar to when Long Island Iced Tea rebranded as Long Blockchain back when crypto started getting popular almost a decade ago.
Image Source: Getty Images
Does Quantum Computing's valuation make sense?
If the details explored above aren't enough to raise your eyebrows, just check out the stock chart below.
One year ago, Quantum Computing was an unknown penny stock. As I write this, shares currently trade for $16 and the company boasts a market cap of $2.1 billion.
Taking this a step further, Quantum Computing stock didn't even really begin to break out at all until the last three months or so. During this time, the company has witnessed abnormal valuation expansion and shares have gotten expensive.
How expensive? Well, considering Quantum Computing's trailing-12-month revenue is only about $386,000, the company is current trading at a price-to-sales (P/S) multiple of roughly 5,400x.
Developing quantum computing requires immense capital in research and development (R&D) and engineering talent. Given Quantum Computing is barely generating revenue, I think it's highly likely the business will remain a heavy cash-burn operation. As such, the company could take advantage of its newfound high stock price to raise capital. In turn, investors buying at Quantum Computing's current valuation would likely experience some degree of dilution.
Should you buy Quantum Computing stock?
When AI emerged as the market's next big megatrend, shares of a company called C3.ai initially witnessed an abnormal surge. I personally believe that one reason for the run-up is because C3.ai's ticker symbol is... "AI".
Back in 2014, Google acquired a company called Nest Labs, which makes smart-home appliances such as thermostats. On the day the acquisition was announced, shares of a penny stock called Nestor skyrocketed. The reason? Nestor's ticker symbol was "NEST", and novice investors confused it for the company Google was acquiring.
The reason I bring these examples up is because it's important to understand that on occasion unsophisticated investors connect dots that aren't really there. While the idea of quantum computing is intriguing, the company Quantum Computing is benefitting more from a narrative and pure luck that its namesake aligns with an emerging technology.
I think investing in Quantum Computing should be avoided. The valuation of the company is stretched, and given its questionable corporate history, it's hard to know if any more twists and turns are in store.
