New Position - IONQ

Investment Analysis Clubs Saul’s Investing Discussions
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IONQ designs, manufactures and sells quantum computers. To date they have not actually sold a computer, but they do sell computing capacity accessible via AWS, GCP, and Azure. This is similar to the way Snowflake generates revenue. They reported that they have a number of prospective buyers of finished systems in both the government and commercial space. If I remember correctly, the sale of a machine is 9 figures. So, quantum computing is no longer just a laboratory experiment, it is an actual, usable machine.

I don’t really understand the technology, but I can briefly describe the primary benefits. To some extent, transit speed is faster in a quantum computer. Digital computers, irrespective of the processor, use electrons to carry information while quantum computers use photons. The speed of electrons through mostly copper is fast; light travels faster. I’m not sure how much of a differential there is, but I think it’s reasonable to assume that speed is a factor. However, the primary advantage quantum computing provides is the ability to solve heretofore intractable problems. For example, virtually all data encryption relies on the difficulty of determining the prime number factors used to generate a very large integer. This is relatively easy to do with a quantum computer. One would hope that isn’t the primary use case for these machines! The capability of a quantum computer is measured in a unit called qubits. Qubits do not add up linearly. Each additional qubit represents a doubling of capability. IonQ has modified this measure such they measure their machines in algorithmic qubits (AQ). The reason for this modification is to take fidelity into account. For example, the machine learning that supports a typical generative AI application doesn’t have a “correct” answer. There are myriad answers, all of which are valid, only some of those answers are more correct than others. I really don’t understand how an AQ value is determined, but there is no apparent dispute about it. In any case IonQ currently has machines that provide 25 AQ and they have a goal of achieving 29 AQ by the end of this year. As noted before, those four AQs represent a 16x increase in capability.

If you want more information about the technology and its application I suggest you take some time and browse the IonQ site (ionq.com).

IonQ has reported 7 quarters. Their most recent quarter, 1Q23, was reported on May 11. The reporting they provide is not extensive, but here are some financial numbers drawn from the quarterly reports (numbers a x1,000):

Revenue Q1 Q2 Q3 Q4
2021 $0.13 $0.93 $0.23 $1.65
2022 $1.95 $2.61 $2.76 $3.81
2023 $4.29

YoY % Q1 Q2 Q3 Q4
2021 - - - -
2022 1,462% 180% 1,081% 131%
2023 119%

IonQ provided some financial information prior to becoming a publicly traded company. Obviously, YoY percentage revenue growth over 1,000% isn’t very meaningful. In simple terms, investing in this company is pretty speculative, nevertheless, I have taken a 3.75% position in this IonQ. As I write this post the stock is trading at $10.77, up 4.25% since yesterday.

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I would like to caution people that while this sounds very interesting, it is very speculative at present. Here is an extract from their last quarterly report:

First Quarter 2023 Financial Highlights

  • IonQ recognized revenue of $4.3 million for the first quarter, above the high end of the previously provided range, compared to $2.0 million in the prior year period. This reflects some activities for one of IonQ’s customer contracts taking place earlier than expected, shifting revenue dollars into the first quarter.
  • IonQ achieved $4.1 million in new bookings for the first quarter.
  • Cash, cash equivalents and investments were $525.5 million as of March 31, 2023.
  • Net loss was $27.3 million and adjusted EBITDA loss was $15.9 million for the first quarter.* Exclusions from adjusted EBITDA include a non-cash loss of $3.6 million related to the change in the fair value of IonQ’s warrant liabilities.

*Adjusted EBITDA is a non-GAAP financial measure defined under “Non-GAAP Financial Measures,” and is reconciled to net loss, its closest comparable GAAP measure, at the end of this release.

okay, let’s take a look.

Quarterly revenue of $4.3 million. This is a tiny company.

Bookings $4.1 million. That’s less than revenue

Net loss was $27.3 million, more than six times revenue.
Operating net loss was $28 million.
They had $4.2 million in interest, which overcame their $3.6 loss in value of warrants
Adj EBITDA loss was $15.9 million. Break even is way, WAY, off.
They have $525 million in cash, which is plenty for them.

Invest cautiously if you want to invest in this company.

Best,

Saul

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@SaulR80683,
Thank you for taking the time to read and comment on my post. You have reaffirmed my observation that this is a highly speculative investment.

It doesn’t take a lot of effort to find a speculative investment. There’s a ton of them. I have been lured in and burned in the past. So, I usually view these “opportunities” with a jaundiced eye.

So what makes IonQ different enough for me to decide to take a small position? Let me quote the CEO from the 4Q22 quarterly report in response to an analysts question about the potential for a system sale in the next 12 to 24 months:
“We continue to think that that (a system sale) is exactly what will happen. In fact, I’m more convinced of that than I’ve ever been before because we continue to have new interested parties and I would say, look we should all realize that there are long sales cycles when we talk about selling systems at retail at multiple tens of millions of dollars.”

With 1Q23 revenue of $4.29M (the largest to date) selling a single system for “multiple tens of millions of dollars” would explode IonQ’s revenue. True, it would be for the quarter in which the sale was made which guarantees nothing as to future revenue. But, it’s safe to assume that they will sell more systems. In addition, their sales of usage via the major cloud providers continues to grow and provides a source of recurring revenue. They are in the process of adding a second machine to this environment in order to better insure 24x7x365 availability.

So, speculative as it may be, I am quite confident about this investment. They aren’t selling wishware or a concept. They are selling actual computer capability that heretofore did not exist. The CFO stated that they are confident that they have sufficient cash to carry them to profitability, so it’s unlikely that we will see significant dilution beyond SBC. Also, I did not comment earlier, they are adding (or may have added at this time) a new 65,000 square foot manufacturing facility, coincidently, just a few miles from where I live in the Seattle area.

I would also like to make two corrections of my original post. I stated that their goal was to achieve 29AQ this year. In fact, they have already achieved that goal. The next milestone is 35AQ in 2024. The CEO stated that they are very confident that they will reach that goal. The other correction is that I said that my recollection was that a system sale was a 9 figure number. Based on the comment about a sale stated above, it’s obviously an 8 figure number. That’s still a very large number, but an order of magnitude less than what I had written earlier.

But I also would like to affirm Saul’s words, this is a tiny company with tiny revenue. There’s no guarantee that they will succeed even though they have virtually no competition. Proceed with caution and if you decide to put some money in this company, heed Saul’s advice and keep it small, at least for now. If they grow at a rapid pace there will be time to get in near the ground floor.

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