Motley Fool analyst says do not overpay for Quantum Computing right now

Investors should avoid mid cap Quantum Computing (or QCi), according to Motley Fool analyst Chris Neiger. The company’s revenue remains a fraction of its operating loss, its valuation is extremely high, and the latest rally in the stock appears driven more by speculative sentiment than fundamentals, he argues.

Neiger does not recommend purchasing 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,” he writes.

Over the last 12 months, Quantum Computing shares have risen 270% to $11.50 apiece, pushing its market capitalization close to $2.6 billion. The stock now trades at a price/sales ratio of about 4,500, Neiger notes. QCi’s valuation is far above that of its peers, the Motley Fool analyst points out: IonQ trades at a P/S of 146 and D-Wave at 284. For comparison, the average P/S for a tech company is 9.

“Unfortunately, the stock seems to be rising on investor speculation and overly optimistic predictions about the quantum computing market,” Neiger writes. That does not mean the technology lacks long-term promise or that QCi will not benefit from it, he adds, but buying the stock now would mean overpaying given the company’s weak sales.

"Unfortunately, the stock appears to be rising on investor speculation and an overly optimistic outlook for the quantum computing market," Neiger concludes. "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."

In the third quarter, Quantum Computing’s revenue grew 280% year over year to $384,000. The company also reported earnings per share of $0.01, versus a loss of $0.06 in the same quarter a year earlier. Yesterday, November 17, the first day after the earnings came out, QCi shares rose 8.5% to $11.50 apiece.

For a growth company tapping into a new market, QCi's minimal revenue is "not a good sign," Neiger argues. He also points out that the company's expenses are rising quickly, which, combined with modest sales, indicates that it's "not yet on a path toward profitability." In the period, QCi’s operating loss doubled to $10.5 million.

Some investors might view the company’s swing to net profit as progress, the analyst continues. However, QCi said the improvement was driven by a mark-to-market adjustment to a derivative liability and by interest income, while the company is still not generating profit by selling products or services. 

Quantum Computing has three “buy” ratings from Wall Street analysts versus one “hold,” according to MarketWatch data. The average target price of $23.67 per share implies upside of nearly 2.2 times the most recent closing price.

In early October, Ascendiant Capital Markets analyst Edward Woo reiterated his "buy" rating on Quantum Computing shares and boosted his price target to $40 from $22 per share. Woo sees the technology going hand in hand with ratcheting data generation, which has driven up the demand for high-performance computing. “By being early in this rapidly growing industry, we believe Quantum is well-positioned to capture and drive a meaningful market share and industry growth,” Woo was quoted by Barron's as saying.

The AI translation of this story was reviewed by a human editor.