Subscribers to Chart of the Week received this commentary on Sunday, February 16.
The artificial intelligence (AI) hype machine has gotten to the point where the mere mention of ‘AI’ on an earnings call will send a stock higher. Three years ago, AI was a speculation-laden buzz word with plenty of detractors – present company included.
Timing a transformative trend to the point where its profitable as an investor requires a little research and a lot of luck, all with the steeled mindset that it could all disintegrate at a moment’s notice. There’s such a fine line between success in failure when hunting for the next big thing; AI and virtual reality were both speculative technologies as recently as 2020 and look where we are now with both.
If you missed out on profiting from individual equities related to AI, the next train is already on the tracks; quantum computing could soon wrestle control of the spotlight. For a technology that’s long considered a year away from being a year or two away, signs are emerging that now might be the time to get acquainted. Quantum computing replaces traditional bits – the ‘ones’ and ‘zeros’ are the bedrock of computer coding and used to store and transfer digital information with quantum bits (qubits).
Keeping the technology ‘error-free’ has been the hurdle, and as a result, quantum computing has been speculative, fugazi pixie dust for years, with practical, commercial-grade applications the ever-present north star. But earlier this week, researchers at the University of Oxford announced they built a scalable quantum supercomputer capable of quantum teleportation, a huge breakthrough for the technology’s scalability. A few days later, startup PsiQuantum announced it would have a commercially useful computer as soon as 2027, triggering a frenzy of infrastructure and cybersecurity overhaul.
Which stocks are the pure plays? IonQ Inc (NYSE:IONQ) was a glorified penny stock for most of 2024, until the company secured a $54.5 million contract with the U.S. Air Force Research Lab (AFRL). On Nov. 7, IONQ gapped higher by 34.4% after a third-quarter revenue beat and an acquisition of quantum networking company Qubitekk. The shares were last seen trading at $38.65, down 7.5% year-to-date but up an absurd 251% year-over-year.
IonQ reports fourth-quarter earnings after the close on Feb. 26 and boasts five positive post-earnings reactions from the last two years. The stock’s average post-earnings move of 11.8% after the last eight reports, regardless of direction, pales in comparison to the 19% post-earnings move the options market is pricing for Feb. 27 trading.
IonQ is the leader of the pack, so much so that the company was recently paired by Reuters with Palantir (PLTR), AppLovin (APP), and Reddit (RDDT) to form PAIR, a hypothetical fund that outpaced the Nasdaq-100 (NDX) and Roundhill Magnificent Seven ETF.
Rigetti Computing Inc (NASDAQ:RGTI) and D-Wave Quantum Inc (NYSE:QBTS) are two other names to watch with similar technical backdrops. Quantum computing stocks were flatlined until the fourth quarter of 2024, but subsequently raced to unseen heights, and have since cooled off. These pullbacks to realistic entry points come amid massive short squeeze potential. IONQ, RGTI, and QBTS all have at least 12% of their total available float sold short. For Rigetti in particular, short interest swelled 20% in the most recent reporting period, and the 56.82 million shares sold short is now 23.7% of its total available float.
The sector’s broader sentiment backdrop is, like the technology itself, difficult to project. Calls heavily outflank puts, but is that short sellers seeking calls as an options hedge? And despite the short squeeze potential, there’s not a single “sell” rating from the brokerage bunch for IONQ, RGTI, or QBTS. So while there’s certainly contrarian potential, the volatility of these smaller, focused companies -- most if not all are not yet profitable – means their visible upside comes with a lot of latent risk.
IonQ, Rigetti, and D-Wave all have market caps of $10 billion or less. Like most speculative technologies still in their nascent stage, it’s a wild west frontier of startups, many of which could soon be engulfed by Big Tech giants once they’re done playing around with AI. But while most of Big Tech is still entranced by AI’s allure, tech giants are also monitoring quantum computing, to varying degrees.
Alphabet (GOOGL) boasts its own quantum processor, Willow, that in December completed computations in under five minutes, a feat that would take today's fastest supercomputers billions of years to solve. Microsoft (MSFT) and IBM (IBM) have made serious forays of their own, the former announcing a prototype and the latter updating its roadmap, aiming for the first "error-correct" fault tolerant quantum computer by 2028.
Nvidia (NVDA) CEO Jensen Huang publicly lambasted quantum technology back in January, comments that contributed to quantum stock’s struggles year-to-date. The cold-water rhetoric comes with a caveat; Nvidia’s GPU’s would stand to lose a lot – think DeepSeek selloff -- if quantum computing reaches critical mass. However, Huang is also hedging his bets; Nvidia will host its first ever Quantum Day at its GTC 2025 on March 20. Earlier this week, Bill Gates told The Motley Fool that "There is the possibility that Huang could be wrong," and claimed quantum computing could be here within three to five years.
In addition to the setbacks outlined in the chart above, there is red tape around quantum computing’s commercial introduction. The same Wall Street Journal article titled ‘Quantum Computing is Closer Than Ever, and Everybody’s Too Busy to Pay Attention’ also details how the business value of quantum computing remains “very opaque.”
Any quantum computing breakthroughs would also require massive overhauls to post-quantum cryptography to ensure encryption is up to date. Is our digital infrastructure -- barely holding it together amid the AI boom -- ready for the next frontier? A lot of cybersecurity, software, and ancillary tech sectors could be upended if quantum computing’s timeline is accelerated, and that’s going to ruffle a lot of feathers. The transition won’t be easy and will have its share of detractors looking to derail progress.
What investors need to know is that despite the lucrative possibilities investing in quantum computing brings, the technology is still very much in the speculative, research-based stage. The impasse between speculation and application is still wide, even if the gap is rapidly closing.
For now, the reality is quantum computing at this point can “only a used by a very limited set of technically elite people who are directly running code on the machine.” However, that sort of rhetoric is reminiscent of how many viewed the internet in the early 1990’s. Diving headfirst into an upside-driven, speculative technology in this unstable geopolitical environment may seem counterintuitive. But after seeing how quickly AI took off, taking a flier on the next big thing, even if it means just learning and watching for now, seems like a smart