MW Quantum-computing stocks are soaring as investors place bets on 'the next big thing' in tech
By Joseph Adinolfi
Shares of three tiny companies have seen enormous gains over the past few months
A trio of quantum-computing stocks has seen huge gains over the past few months, bolstered by a wave of hype from retail investors looking to cash in on what could be the "next big thing" in tech.
Shares of Rigetti Computing Inc. (RGTI), D-Wave Quantum Inc. $(QBTS)$ and IonQ Inc. $(IONQ)$ - all small-capitalization stocks closely associated with quantum computing - have gained 843%, 455% and 398% in the three months through Tuesday's close, FactSet data showed.
The Defiance Quantum ETF QTUM - which invests in a number of mature and developing companies involved in quantum computing and machine learning - has gained more than 30% over the same period.
For shareholders of these companies, the gains amount to only a few billion dollars' worth of value creation. Still, a steady drumbeat of new developments, coupled with their strong performance in the market, appears to have piqued investors' interest.
The latest market-moving announcement landed shortly before the closing bell on Monday, when Alphabet Inc.'s $(GOOGL)$ $(GOOG)$ Google Quantum AI unit published what some experts characterized as a potential breakthrough in the field that could accelerate the development of a commercially viable product.
Shares of all three of the small-cap companies named above briefly rallied on the news on Tuesday, although only one - Rigetti - managed to hang on to its gains by the time the closing bell rang. Shares of both IonQ and D-Wave Quantum continued to slide on Wednesday.
But setting these latest moves aside, their recent spurt of gains still represents a notable turnaround since the bursting of the SPAC bubble had saddled their shareholders with major losses. All three companies were taken public via mergers with shell companies during the so-called SPAC boom, and D-Wave Quantum and Rigetti have continued to trade well below their peaks from 2020 and 2021.
Over the past two weeks, users have flocked to posts on Reddit and other social-media platforms to share their hopes, questions and concerns about a technology that some feel could be the next big development in tech.
To longtime market watchers, it is just the latest example of retail investors' affinity for speculative technology bets.
"This market loves a sexy technology theme; we certainly know that's the case with AI," said Steve Sosnick, chief strategist at Interactive Brokers. "It wouldn't surprise me in the least if people move on to quantum computing."
But there is one important distinction between quantum computing and AI that investors should keep in mind. Although there is hope that there could be synergies between the two technologies, quantum computing is still years away from producing a commercially viable product.
For now, investors seem to be brushing off these concerns, as these stocks have been swept up in the frenzied trading activity that has increasingly dominated the U.S. market - a dynamic that appears to have shifted into overdrive following President-elect Donald Trump's victory in the Nov. 5 U.S. election.
Given their focus on a still-unproven technology, these companies remain extremely speculative investments.
"It's hype on hype," said Daniel O'Regan, a managing director at Mizuho Securities USA, in response to a question about what's driving these companies higher. "They don't really have any revenue. People who are gravitating toward some of the [quantum-computing] pure plays are trying to dream the dream. They're betting that this could be the next, next big thing."
A few other factors have contributed to their meteoric rise, according to O'Regan, including the fact that shares of all three had been heavily shorted, leaving them vulnerable to a short squeeze.
IonQ, the most mature company in the group, is expected to report sales of just $41.4 million during the 2024 calendar year. During the brief period that these companies have been publicly traded, none has produced a quarterly profit, according to FactSet data.
Name Market Cap Projected 2024 sales Rigetti Computing $1.6 billion $16.2 million D-Wave Quantum $1.4 billion $9.1 million IonQ $7.1 billion $41.4 million
Furthermore, their quest for commercial viability faces another potentially enormous obstacle: entrenched competition from companies with far more resources. Alphabet and IBM Corp. $(IBM)$ have already invested heavily in their own quantum-computing technology, O'Regan noted.
But as more Big Tech names scramble to gain a foothold, one or more of these three small-cap companies could potentially find itself the target of a takeover bid.
To some, that could be reason enough to keep plowing capital into their shares.
A breakthrough
In November, Amazon.com Inc.'s $(AMZN)$ Amazon Web Services segment unveiled a new advisory service focused on quantum computing.
Then on Monday, Google published the results of a breakthrough involving its quantum-computing chip, Willow, in the scientific journal Nature. The paper confirmed that Willow had performed a computation that would have taken a classical supercomputer 10 septillion - that is, 10 to the 25th power - years to complete. It also demonstrated a level of error control that Google said represented a breakthrough that the field has been working toward for decades.
By the time the closing bell rang on Tuesday, Alphabet was sitting on a 5.6% gain, boosting its market capitalization by nearly $120 billion. Shares were up another 4% in recent trading on Wednesday.
Rigetti also managed to hang on to a sizable double-digit advance after announcing a quantum-computing breakthrough of its own. The company's shares finished 45% higher, and were continuing to climb another 16% on Wednesday, recently trading at $7.55 a share, according to FactSet data.
Those moves were big on a percentage-point basis. But to help put things in perspective, the increase in Google's market cap on Tuesday alone dwarfed the size of all three of the small-cap companies put together.
What is quantum computing?
Quantum computing has been studied for about three decades now, according to William Oliver, the Henry Ellis Warren (1894) professor of electrical engineering and computer science and a professor of physics at the Massachusetts Institute of Technology.
It aims to replace conventional classical computers in tackling certain types of complex problems. Although there are a couple of different methods for putting the technology into practice, Google's new chip uses superconducting materials and electrical circuits to create qubits, the fundamental logical unit that powers these quantum processes.
In theory, the computing power of these units should dramatically eclipse their classical counterparts. Drug development and other types of complicated research have been cited as potential applications.
But there is one critical problem that engineers still need to untangle: The qubits used to carry out quantum computations are inherently unstable, forcing engineers to employ special algorithms to correct the errors that will inevitably occur.
For years, adding more qubits to a quantum computer didn't seem to have much of an impact on the accuracy of these computations. If anything, it made them less reliable.
That is what made the latest demonstration from Google so notable. The company's chip managed to show that the addition of more qubits helped bolster its error-correcting abilities.
"It's a very important demonstration. We're still at a very early stage of the technology," Oliver told MarketWatch on Tuesday. "They showed that you can take qubits that are faulty, add more of them to the system, and the system gets better. This is exactly what we need to have happen if we're going to commercialize quantum technology."
Since Google's Monday announcement, people have had plenty of questions about the long-term impact of quantum computing. One concern that has surfaced repeatedly on platforms like X: could quantum computing potentially threaten the encryption that secures cryptocurrencies like bitcoin?
Oliver said the answer is yes, although such capabilities are likely still 10 years away, if not more. Still, he said it is imperative that cryptocurrencies switch to post-quantum encryption as soon as possible. The National Institute of Standards and Technology has already released its postquantum encryption standards, he pointed out.
-Joseph Adinolfi
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(END) Dow Jones Newswires
December 11, 2024 15:01 ET (20:01 GMT)
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