Is Quantum Computing Stock a Buy?

Share prices of Quantum Computing (NASDAQ: QUBT), also referred to as QCi, have surged 390% over the past three years as investors have become increasingly bullish on the long-term prospects of quantum computing.

Quantum computing holds significant potential to benefit numerous industries, including cybersecurity and artificial intelligence, and some estimates put its estimated market size at more than $100 billion over the next decade.

Understandably, that market opportunity has many investors excited. But do the potential of quantum computing and QCi's current opportunities make the stock a buy? Let's consider both the bull and bear cases.

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The bull case for Quantum Computing

QCi has impressive technology that utilizes light and photonics to create quantum computers capable of operating at room temperature, a unique capability in quantum computing.

QCi's tech is more than just theoretical. It's been used in real-world applications, including recently by a major automotive manufacturer for research and development and by NASA Langley Research to use quantum computing for space-based LiDAR (light detection and ranging) research.

QCi also built a "first-of-its-kind" photonic foundry, giving the company the ability to build future technologies for clients based on its tech, including next-generation telecom and datacom hardware, according to the company. The global market for photonic integrated circuits is projected to more than double over the next few years, reaching over $38 billion by 2029.

Furthermore, QCi has approximately $1.6 billion in cash reserves to support current and future investments, providing it with a substantial runway as it expands its products and services.

Quantum Computing's bear case

The bear case for QCi is pretty straightforward: The company has minuscule revenue, costs are rising rapidly, and its stock valuation is very expensive.

In the company's recently reported third quarter, revenue increased by 280% year over year to $384,000. The jump was partly due to an increase in research and development contracts. While it's easy to look at the substantial percentage gain from the year-ago quarter, investors need to realize that the amount of its sales pales in comparison to its operating loss of $10.4 million in the quarter.

Similarly, some investors might point to the company's swing to net income of $0.01 per share in the third quarter, up from a loss of $0.06 in the year-ago quarter, as a sign of progress. However, QCi noted that this improvement primarily resulted from a $9.2 million gain related to the mark-to-market adjustment of a derivative liability, as well as $3.5 million in interest income. In other words, the earnings weren't generated by selling products or services. Instead, the company's liabilities simply decreased in value, which was recorded as an accounting gain.

For a growth company tapping into a new market, QCi's minimal revenue is not a good sign. What's more, the company's expenses are rising quickly, with research and development costs doubling year over year in the third quarter to $4.5 million. The company's rising costs and modest sales indicate that it's not yet on a path toward profitability.

And finally, shares of QCi are extremely expensive. Its stock has a price-to-sales ratio of about 4,500, making it more expensive than fellow quantum computing stocks IonQ, with a P/S ratio of 146, and D-Wave's 284.

For even more context, the average P/S ratio for the tech industry is 9. So while all of these quantum computing stocks have eye-watering valuations, QCi's is extremely high by any comparison.

Don't buy Quantum Computing stock right now

While QCi has some impressive technology, its success is far from guaranteed. Its revenue is small and declining, and its valuation is in the nose-bleed section of the stock market.

Unfortunately, the stock appears to be rising on investor speculation and an overly optimistic outlook for the quantum computing market. That doesn't mean quantum computing isn't a good long-term technology or that QCi won't benefit, but buying this stock now means overpaying for a company that is having a difficult time generating sales.

Chris Neiger has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends IonQ. The Motley Fool has a disclosure policy.