RPT-BREAKINGVIEWS-Quantum chip M&A puts memes in superposition

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

By Robert Cyran

NEW YORK, Jan 26 (Reuters Breakingviews) - What does a meme stock have in common with a cat in a box? When the frothy company in question is IonQ IONQ.N, it’s a matter of quantum uncertainty. Physicist Erwin Schrödinger imagined a feline in a sometimes-fatal trap as both alive and dead, simultaneously, until observed for sure. For the firm run by CEO Niccolo de Masi, a $17 billion valuation rests on the immense promise of revolutionary technology that it now says is a mere engineering challenge away. A deal to buy chipmaker SkyWater Technology SKYT.O, announced Monday, to speed its progress is a helpful way to put inflated stock to work and generate yet more hype. Yet it may bring the perilous moment of observational truth ever closer.

Quantum computing could reshape cryptography, biology and materials science. Yet Nvidia founder Jensen Huang said it’s 15 to 20 years away. Alphabet boss Sundar Pichai, whose firm has invested heavily in the area, said that the technology seems like artificial intelligence was five years ago.

Investors seem unperturbed by these cautious notes from the best-resourced tech companies on the planet. Prior to the deal announced on Monday, analysts expected IonQ to generate $100 million in revenue this year, according to LSEG data. That’s about what Nvidia’s revenue was in 1998, before growing at a 30% compound rate since, a record few will ever match. That company's valuation when it went public a year later: only $350 million. To boot, Nvidia generated cash, unlike IonQ.

Nonetheless, De Masi has been putting his wildly lofty valuation to frenzied work, agreeing to pay over $1 billion in stock for quantum tech developer Oxford Ionics and another 12 million shares for optical networking startup Lightsynq Technologies. Over half the consideration for SkyWater paid will be in stock, and the unit will provide perhaps $600 million of revenue this year.

It’s a canny move in some ways. Theoretically, owning a chip foundry would allow for faster prototyping and tweaking. Perhaps more excitingly, the U.S. government is providing hefty carrots and sticks to encourage chip production be brought back onshore, with news of federal backing helping to send leading chipmaker Intel’s INTC.O stock soaring from deep doldrums last year. In a sense, it’s doubling up on retail investor favorites: all-or-nothing tech bets, and the favor of Uncle Sam.

Yet chipmaking is brutally difficult, even for the best in the business - look again at Intel, its stock down 21% since reporting dismal results weighed down my manufacturing. Puffing up a stock with a story is one thing, but success eventually depends on delivering hard and useful products. Clearly demonstrated failure might collapse the quantum hype.

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CONTEXT NEWS

IonQ said on January 26 that it had agreed to buy contract semiconductor manufacturer SkyWater Technology in a deal valued at approximately $1.8 billion.

The quantum computing company will pay $35 per share, consisting of $15 of cash and $20 in stock, subject to a collar. The price represents a 12% premium to where SkyWater shares closed on January 23, the last day of trading before the deal was announced.

Cantor Fitzgerald and Bank of America are serving as financial advisors to IonQ. Goldman Sachs advised SkyWater.

(Editing by Jonathan Guilford; Production by Maya Nandhini)

((For previous columns by the author, Reuters customers can click on CYRAN/robert.cyran@thomsonreuters.com; Reuters Messaging: robert.cyran.thomsonreuters.com@reuters.net))