Is Quantum Computing Stock a Buy Right Now?

Over the last few months, a new theme has emerged in the artificial intelligence (AI) realm. Quantum computing has attracted a lot of enthusiasm from investors, and several companies attempting to commercialize and advance this cutting-edge technology have experienced rapid gains in their stock prices.

One such company, aptly called Quantum Computing (NASDAQ: QUBT), has recently come into the spotlight: In the last three months, its shares have soared by about 2,400%. Yet despite the potential for quantum computing (the technology) in the overall digital landscape, I have some major questions about Quantum Computing (the company). Is it actually on the verge of playing a leading role in AI's next big megatrend, or is it a stock that should best be avoided for now?

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Quantum Computing's interesting history

It's rare for a stock to rise as much as Quantum Computing stock has during such a short time period. It's even more unusual when the company in question is relatively unknown -- which is the case here. After digging through some of Quantum Computing's filings with the Securities and Exchange Commission (SEC), I think my suspicions are valid.

Quantum Computing was founded in 2001 under the name Ticketcart, operating a business that originally focused on selling ink-jet cartridges for printers manufactured by Canon and Hewlett Packard. In 2007, Ticketcart pivoted its business after it acquired Innovative Beverage Group and subsequently changed its name to Innovative Beverage Group Holdings (IBGH). As the name implies, it then focused on beverage distribution.

By 2013, IBGH had gone out of business and was later sued by a prominent shareholder who alleged that management had "allowed the Company's assets to be wasted."

After the legal turbulence settled in 2018, the company essentially pivoted again, rebranding itself as Quantum Computing Inc. Four years later, in the summer of 2022, Quantum Computer acquired QPhoton, a developer of systems and technologies in the quantum photonics space. That's the company's core business nowadays, but with little to show for it in terms of revenue-generating contracts.

To be fair, even the largest companies in the world find themselves enmeshed in lawsuits from time to time. However, such cases usually involve allegations over intellectual property or adjacent matters.

Pivoting from one significantly different idea to another doesn't inspire confidence, and I find IBGH's decision to change its name to Quantum Computing to be eerily reminiscent of Long Island Iced Tea's move to rebrand itself as Long Blockchain back when crypto started getting popular almost a decade ago.

Image source: Getty Images.

Does Quantum Computing's valuation make sense?

If all that isn't enough to make you raise your eyebrows, you should check out this stock chart.

QUBT data by YCharts

One year ago, Quantum Computing was an unknown penny stock. As I write this, shares currently trade for $16 and the company boasts a market cap of $2.1 billion.

In fact, the stock didn't even really begin to break out until about three months ago. During this time, the company has witnessed abnormal valuation expansion and its shares have gotten expensive.

How expensive? Well, considering Quantum Computing's trailing-12-month revenue is only about $386,000, its price-to-sales multiple is roughly 5,400.

Developing quantum computing systems requires significant capital investments in research and development, as well as engineering talent. Given that Quantum Computing is barely generating any revenue, I think it's highly likely the business will be burning cash heavily for some time.

As such, the company could take advantage of its suddenly soaring stock price to conduct secondary offerings to raise capital. If management does take that step, prior investors will experience some degree of dilution. That would particularly impact those who buy in at the current valuation. Quantum Computing generated $14.6 million of much-needed cash this way in the first three quarters of 2024. Future cash grabs may get more burdensome.

Should you buy Quantum Computing stock?

When AI emerged as the market's next big megatrend a couple of years ago, shares of a company called C3.ai witnessed a remarkable surge. I personally believe that one reason for that run-up was because C3.ai's ticker symbol was "AI."

Back in 2014, Google purchased Nest Lab, which makes smart-home appliances such as thermostats. On the day that plans for the acquisition were announced, shares of a penny stock called Nestor skyrocketed. The reason? Nestor's ticker symbol was "NEST," and novice investors confused it for the company Google was acquiring.

The reason I bring these examples up is because it's important to understand that, on occasion, unsophisticated investors connect dots that aren't really there. While the idea of quantum computing is intriguing, the company Quantum Computing appears to be benefiting largely from an interesting narrative and the good luck of having the same name as an emerging technology in the AI arena.

I think Quantum Computing stock should be avoided. The valuation of the company is stretched, and given its questionable corporate history, it's hard to guess what twists and turns may be in store.

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Adam Spatacco has no position in any of the stocks mentioned. The Motley Fool recommends C3.ai. The Motley Fool has a disclosure policy.