I think IonQ could be a hundred-billion-dollar company and represent this decade’s largest return on investment. There will be casualties and disappointments in this sector, but in my mind, IonQ is already approaching the winners’ circle; a quantum advantage in 2025 is realistic for IONQ. It is years ahead of its big company competitors and lightyears ahead of the other Quantum startups.
Quantum Computing companies have exhibited extreme share price volatility in recent weeks; Rigetti (RGTI), D-Wave (QBTS), and IonQ (NYSE:IONQ) have seen share price changes of over 30% in single days, both up and down. The image below shows recent weekly and monthly movements (counting backward from today, Aug 17th).
Quantum Price Movement (Author Database)
This volatility could represent a massive opportunity if we pick the right company. The markets believe these companies have a tremendous opportunity ahead of them. I believe IONQ is the right company and will garner this volatility into considerable gains in the coming years.
Background
This is my third article on Quantum computer startups. I have already written about D-Wave (whom I like and have invested in) and Rigetti (whom I did not like and have not invested in). I have tried to explain the concepts, science, and mathematics behind quantum computers as I go.
In the Rigetti article, I tried to explain the critical concept of superposition and the history of mathematics leading to the search for quantum computers. In this article, I will try to explain the theory of entanglement and IONQ’s concept of Algorithmic Qubits. Some of this article will refer to concepts in the Rigetti article. I will use *RA* to mark this.
What is so special?
The difference is Quantum, IONQ, and QBTS are building Quantum computers, and the rest are not. Rigetti, International Business Machines (IBM), Alphabet (GOOGL), Baidu (BIDU) (HKG9888), and others are trying to develop synthetic Qubits (often called QuDots *RA*) using superconducting materials at low temperatures to give them zero resistance. The synthetic method is making good progress. IBM has moved a long way and has a machine with over 1,000 synthetic qubits *RA*.
The QuDots provide one of the critical requirements of a Quantum Computer, superposition *RA*. However, the second crucial requirement, entanglement, is another story, and without entanglement, you cannot have the exponential growth in computing power that Quantum computers promise.
IONQ have developed a trapped ION technology; they begin with a ytterbium atom and remove one of its two electrons with lasers. (Ytterbium is a rare earth metal chemical symbol Yb, soft and silvery looking. Mined in China and the US in large quantities) Once the electron is removed, it is known as an ion. Hundreds of electrodes hold the ion precisely in place, producing an oscillating electromagnetic field trapping the ion inside a vacuum.
The vacuum is inside the quantum processing chip, and the ion is isolated from the environment by the vacuum. This approach is not unique to IONQ. The physics department of Oxford University in the UK is one of many academic institutions looking at this area of research.
Entanglement
Entanglement leads to Quantum computers’ exponentially greater computing power than today’s classical computers. Without entanglement, Quantum computers would have only superposition as an advantage meaning that they would have faster and larger memory *RA*.
I think entanglement will be the most important scientific concept for the coming decades; it could be the fundamental force that holds space and time together. Entanglement’s why and how remain elusive; however, its existence has been proven beyond doubt.
Einstein did not believe entanglement was possible; in his famous paper (now generically referred to as EPR), he described it as “spooky communication.” Einstein thought that entanglement meant particles were communicating over vast distances faster than the speed of light, something he had proven to be impossible.
It was not until the 1970s, when researchers at Caltech proved the existence of entanglement, that it became entirely accepted.
Experiments show that entanglement does not involve communication; it is a deep connection between particles that begins at the moment of entanglement. Particles become entangled when they are so close together that they become indistinguishable. When separated, they appear almost identical and remain a correlated version of each other over any distance. The Chinese communication satellite Micius uses entangled quantum particles for encryption and has shown that particles remain entangled even when the distance between them is over 1000 Km.
Understanding entanglement
In the Rigetti article, I tried to use a radar analogy to explain superposition; here, I will use another analogy to give readers an insight into how entanglement can be thought of.
Think of two identical twins separated at birth; they began as a single cell that split in half, and each half developed into a separate baby. After delivery, the babies were adopted and could have gone to very different families. One rich living in the Hamptons, one poor in the projects; however, if you saw them aged 20, they would still look similar, and they probably would have similar interests, perhaps preferring music to sport. They could both have chosen a dog as a pet and hate the taste of Ketchup. Looking at one of the twins would give a great deal of information about the other even though they have never communicated, measuring their characteristics; for example, if one twin is 5 ft 7 inches, then you can be pretty sure how tall the other would be.
Entangled particles are like twins inextricably linked, with many correlated but not necessarily identical features.
Entanglement can occur in systems of particles; millions, even billions of particles, can be entangled so that every particle in the system is entangled with every other particle. It is thought to occur among the atoms in living beings and other materials the particles becoming an entity.
You must be careful how you measure entangled particles; if you looked at the back of the Hampton twin, you would get no information about the face of the other. Similarly, the weight of one is not the same as the height of the second. This is true in quantum entanglement; the angle and position of the measurement relative to the particle are crucially important.
One of the twins may have learned to play Chess, but the other may not; they can have separate knowledge and skills but remain correlated in other ways.
When thinking of entanglement, think of the twins; they began as a single cell and will carry similarities with them.
Entanglement is more important than Qubits
An 11-Qubit system would require 54 entanglements, shown below.
Mystic Rose Diagram (IONQ website)
Each blue dot is a Qubit, and each orange line is an entanglement.
100 Qubits need 5,050 entanglements, and 1000 Qubits need 500,500 entanglements.
Entanglement is IONQs great advantage. Synthetic Superconducting Qubits need synthetic superconducting entanglements. Each QuDot must be connected by superconducting material to every other QuDot in the system. That is an immense task, and controlling all these superconducting electronics may be impossible. Errors will creep in at every change in temperature and with every passing photon. Plus, you can’t even measure things to ensure it is going well *RA* information leakage is a real problem.
IONQs Qubits are entangled by nature. IONQ do not have to build or control entanglement; it is endemic to their machine and is potentially a huge advantage.
Algorithmic Qubits (AQ)
In the short seller report, Scorpion (see below) mentioned that the CEO of IONQ kept repeating misleading statistics about the size of the IONQ computer. I don’t believe he was; no industry standard measurement of quantum computing power has yet been developed. The CEO used IONQs measure rather than the usual quantum space figure.
Simply talking about Qubits and space ignores the power of entanglement, which is the computer’s biggest part. Some QuDots only entangle adjacent particles, so the image above would have only 11 orange lines around the outside.
The combinations of entanglements is also essential. The 11 Qubit diagram above has 990 possible three-qubit entanglements, all of which should give separate and additional computing power. The power of a quantum computer is a function of its Qubits, their entanglements, how they can operate separately, and their fidelity (error rate).
To measure quantum computing power IONQ has devised the measure AQ, which attempts to provide a benchmarking scale.
AQ aims to measure what computing power the computer can deliver rather than what physical components it has.
AQ measures how many encoded states the system can exist in and how many can be used to output information. The AQ measure includes error correction and the ability to perform gate operations (gate operations are the mathematical manipulations needed to perform calculations); adding 1 extra qubit that is thoroughly entangled and error corrected effectively doubles the AQ. This is reasonable as it would double the amount of work that could be done and double the number of encoded states that can exist.
Doubling is a powerful tool.
1 AQ = 2 encoded states
51 AQ = 2,251,799,813,685,248 encoded states
The AQ measurement is helpful but not industry-accepted. Presently, only IONQ use it.
Which AQ numbers matter?
AQ 35
34,359,738,368 encoded states, it is the point at which classical computers cannot simulate the operations of the quantum algorithm. It is the point at which Quantum computers can solve problems that hybrid quantum/classical cannot. It will be a seminal moment Quantum Advantage will have arrived when an AQ35 computer is available for sale.
IONQ expects to produce the first AQ35 Quantum Computer in 2024, and last quarter announced they had sold one for 18 million dollars; it is due for delivery 2024. (earnings call Q&A session)
AQ64
The same customer who bought the AQ35 computer has placed an order for the AQ 64 IONQ (due end of 2025)
AQ64 is another important step, it would be the first quantum computer more powerful than the world’s largest supercomputer.
The world’s largest supercomputer is the Hewlett Packard OLCF-5 based in Oak Ridge, Tennessee. Its power is measured in floating point operations per second or FLOPS, and the OLCF-5 has achieved 1.1 Quintillion FLOPS. The AQ 64 will be able to operate at 18 quintillion FLOPS (18 quintillion FLOPS is 18,000,000,000,000,000,000 operations per second). With a price tag of $18 million, the AQ64 will outperform the $600 million OLCF-5 by an enormous margin.
Where are we now?
IONQ is selling access to its AQ29 via its cloud operation. IONQ produced the AQ29 seven months ahead of schedule and announced its successful implementation during the Q2 earnings call. In the call, IONQ maintained their guidance of adding 1 AQ per month, something they have said repeatedly and is evidenced by the timeline new devices have arrived.
Proof in the pudding
There is still a great deal of debate about whether or not Quantum computers will ever work, when they will arrive and how useful they will be. IONQ currently has its 29AQ machine working and is producing impressive commercial success and scientific research.
Commercial Progress
Recent customers include Hyundai (OTCPK:HYMTF), Airbus (OTCPK:EADSF), GE Research, Goldman Sachs, and the US Airforce Research Lab. (Q2 earnings)
The Hyundai deal was first signed in January 2022 and expanded in December. I consider the extension to be commercial validation. After 12 months with the machine, Hyundai extended and increased the deal’s scope. Hyundai is now looking at two areas; in the search for new battery materials, Hyundai is using the IONQ AQ29 to run electrochemical metal simulations; previously, it was limited to lithium only. Hyundai is also using IONQ tech to improve the object detection its autonomous vehicles use. IONQ and Hyundai have shown that their machines are better at object detection and learn faster than classical computing alternatives.
Airbus signed a deal in August 2022 to develop an aircraft loading and machine learning application with IONQ. The project should run for 12 months, and its results will be significant. If Airbus extends the agreement and looks at additional areas such as aerodynamics like Hyundai, it will be another sign that quantum is making a significant difference. I hope to hear about the progress of this deal at the upcoming investors’ day.
New demand for quantum computing arrives all of the time, on Aug 15th SA reported that IONQ had signed a deal to develop AI with Zapata.
Future demand
The moment IONQ releases the AQ 64, I expect a significant demand increase. At that point, no current computer, including the world’s largest supercomputers, can come close to the computing power available from an IONQ AQ64.
The world currently has 500 supercomputers, with around 150 new ones arriving each year. That represents a market of 150 x 18 million = $2.7 billion in revenue per year for IONQ. IONQ may capture all of this business within two or three years.
A recent report from Markets and Markets forecasted a 38% CAGR for the quantum computing industry, with 2028 estimated to be $4.4 billion.
At $18 million, the AQ64 computer will be affordable for large companies, government research agencies, large-scale data centers, and the existing market for Quantum/Supercomputers. If the IONQ AQ64 delivers on price and performance, current forecasts could be out by a factor of 10.
The potential market is enormous. Due to its natural entanglement, IONQ will likely have a first-mover advantage and enhanced AQ. That is ignoring the temperature issue. Currently, the synthetic QuDots of the competition must be cooled close to absolute zero, and IONQ’s trapped ION technology works at room temperature. (recent research suggests superconducting material at low temperatures may be possible. The new material is called LK99; having read the paper, I think it is bad science that will not prove accurate, and I am not the only one.)
Manufacturing
IONQ delivered their AQ29 computer seven months ahead of schedule and appears to be increasing computing power at 1 AQ per month. That would imply that AQ35 will arrive before the end of 2023 and the all-important AQ64 by Q1 2026. So far, 1 of the AQ 35 machines and 1 of the AQ64 machines have been sold to the same customer in Basel.
I expect the bookings figure to grow as IONQ approaches the AQ 64 threshold. When it arrives, it will be the most powerful computer man has ever produced and will be at least three years ahead of the comparable machine on the IBM roadmap *RA*.
In January, IONQ announced its intention to build the world’s first quantum computer manufacturing site in Bothell, Washington State. In the Q&A section of the Q2 earnings call, the CEO said the factory had its permits in place, and construction was underway; he also said it was on time and budget. The Basel machine will be built in this facility so we can expect it to be operational Q1 2024, but we have to wait for confirmation.
Scientific success
IONQ is a publishing powerhouse; the output of scientific papers is much larger than the other Quantum computing companies I looked at. Scientific papers starting in 2016 track the company’s technical milestones, from its first single qubit programable computer to optimizing entanglement, quantum gates, and circuits.
The introduction of the current trapped ion technology and the techniques of fault-tolerant error correction are covered. It is all there if you want to read the full history of technological progress. The final article is a peer-reviewed publication in the magazine Nature showing how to use a quantum machine for cryptographic uses beyond the capability of classical computers.
Due diligence
I think I have made it clear that I believe Quantum computing is very close and is an inevitability, I also feel that IONQ is leading the field, but it is just my view and is not universally accepted.
The outlook for Quantum Computing companies is uncertain, and there is much disagreement about IONQ.
The Short Seller Scorpion Capital published a report in 2022 claiming that IONQ was a PONSI scheme, a scam whose products do not work, whose CEO knew nothing about the technology, and who lied publicly. Whose founders have not left their previous teaching positions because they don’t believe IONQ will work.
Short Seller reports have kept me out of trouble in the past. I always read them before investing and find them of varying quality. In my opinion, the Scorpion research is poor. It is based on unnamed experts and former employees.
The evidence that IONQ products do not work is from an expert who wrote a program to add small numbers together and ran them on the IONQ cloud service. The expert’s name, qualifications, and experience are not provided, the program they allegedly wrote is not made available for checking,, and the IONQ machine’s output is not presented. I read the Scorpion report in detail and could not verify its claims.
The misleading statements from the CEO all relate to the Algorithmic Qubit measure I have discussed and the argument about founders not leaving their teaching role invalid. No mathematics lecturer would ever leave his doctoral students without a mentor; it is just not the done thing. I remained in contact with my mentor until his death ( in a future article, I will tell the story of how he wrote to NASA saying the recently published designs for a shuttle (in the 1980s) would crash because it was a hairy orange).
Recent articles on SA have described IONQ as a story stock without clear evidence that it will ever produce a meaningful product or a profit.
Price targets from wall street suggest only a 15% upside (SA), and only half of analysts recommend buying.
Ratings page (Seeking Alpha)
Using Wallstreet Analysts’ forecasts, Simplywall.st believes IONQ is overvalued by 400%.
DCF value (Simplywall.st)
Finances
IONQ has a strong balance sheet with zero debt and enough cash to last well into 2026 using its current spending and income figures.
Balance Sheet Summary (Author Database)
Revenue has been multiplying.
Revenue by Quarter (Author Model)
The image above is from my mathematical model for IONQ and shows the significant revenue growth both Q on Q and Y o Y. The figures in white are my forecasts for the rest of the year. I update them each quarter; Q2 blew away my projections, as did Q1. It adds to a forecast of $19 million in revenue FY 2023 against $3.8 million in 2022, a 480% increase. I do not yet have a firm grip on the IONQ margin; it dropped in Q2, and I will await Q3 to see how it is progressing. In these early-stage revenue companies, margin is always bumpy as it is a mix of service agreements and milestone payments. IONQ do report bookings each quarter; they increased to $28 million in Q2 from $4 million I expect this figure to be very bumpy for at least two or three years.
Last quarter bookings will likely be the sales of the AQ35 and AQ64 computers to Europe (Q2 earnings Q&A)
The model has a positive EBITDA in 2027; the assumptions are still too general to develop a DCF, but as time goes on and I gain more confidence with the projections, I can calculate a fair value. This model is currently only valid to track performance. When the AQ35 and AQ64 arrive, we will get early sales data to project into the future.
Selected Line Items (Author Model)
Conclusion
IONQ has entanglement, it has Qubits, it has customers, it has peer-reviewed papers confirming its science, and it has cash.
By 2025 it should have the world’s most powerful computer and be two years away from Quantum Supremacy.
I am long IONQ at $5.01 and $14.88; my technical plan has two possibilities: turning higher in the coming days or a pullback to around $12 before a significant move higher. In both scenarios I am targeting a return in the hundreds of percent.
I will update you in the comments section as things progress on the technical front.
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