IonQ and Alphabet represent two opposite ends of the quantum computing investment spectrum.
Quantum computing is emerging as the next big investment trend, although we’re still a few years out from seeing commercially viable quantum computing. As a result, investors are wondering what the best approach to quantum computing is.
There are publicly traded quantum computing investments, like IonQ (IONQ 5.63%), that have massive upside if they work out. However, they also come with big risks if their technology isn’t adopted. Multiple big tech companies are also involved in the quantum computing arms race, like Alphabet (GOOG 1.27%) (GOOGL 1.23%). These companies have nearly unlimited resources compared to the start-ups, but don’t have near the upside. This makes them safer picks, but investors might be worried they’re leaving too much potential on the table by not taking some risk.
So, between the two, which is the best quantum computing investment right now?
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Investors must pay a premium for IonQ
There is a significant size difference between the two companies. Alphabet is a tech behemoth with a market cap of $2.9 trillion, while IonQ is a comparatively small $17 billion company. However, despite Alphabet’s size, the stock is far cheaper than IonQ. Let me explain.
Currently, IonQ isn’t making a ton of money. It’s relying on various research partnerships and contracts that it has signed to generate revenue. In Q2, it recognized revenue of $21 million, which is a rounding error compared to Alphabet’s results. Alphabet generated $96.4 billion in revenue during Q2, making IonQ’s revenue 0.0218% of Alphabet’s total. That’s a huge difference.
With Alphabet, you’re paying about 8 times sales for the stock, or for every dollar of sales over 12 months, you’re paying $8. IonQ trades for 242 times sales, so it’s quite a bit more expensive.
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This mismatch is because the market is far more excited about IonQ’s future than Alphabet’s. Should both companies develop commercially relevant quantum computing systems, the effect it will have on each company’s growth is quite different. For Alphabet, it will likely contribute a few extra percentage points each quarter. For IonQ, a major system sale could cause its revenue to double or triple year over year. That explosive growth is what excites investors the most with IonQ, although it’s far from guaranteed.
Buying both stocks allows investors to balance risk
There’s no guarantee that the approach Alphabet or IonQ is taking will be a winning one. There may be a hidden flaw in each company’s design that doesn’t appear for a few years, which could eliminate them from contention in the quantum computing arms race.
While this would be disappointing for Alphabet, it wouldn’t be the end of the world. It would continue down its path of AI dominance and also thrive on the advertising revenue generated by the Google search engine.
Unfortunately, if this happens to IonQ, the stock would likely go to $0, losing investors a ton of money. This scenario is probably more likely for IonQ than quantum computing success, and investors must be aware of this risk.
So, which one is the better buy? I’d say if you’re afraid of a stock going to zero, then IonQ is one to avoid, and Alphabet is more attractive. However, I think there’s a better approach. By devoting no more than 1% of your portfolio positioning to a quantum computing long shot like IonQ, you can capture some of the upside if it makes it big while limiting downside risk. Additionally, by purchasing shares of Alphabet to balance this risk out, investors can get two impressive quantum computing plays. This basket approach is a smart way to invest in an emerging field like quantum computing, as it balances out risk by investing in multiple companies.