IONQ

Moat: 1/5

Understandability: 3/5

Balance Sheet Health: 3/5

IONQ, Inc. is a quantum computing company focused on developing and commercializing trapped ion quantum computers.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

IONQ is an early stage quantum computing company. At this stage, they do not possess a moat, they have minimal to no established position, or any real barriers to entry to their market yet.

Business Overview IONQ is a quantum computing company that designs and builds trapped ion quantum computers. The company’s goal is to make quantum computing accessible for widespread commercial use, specifically targeting complex problems in areas such as material science, drug discovery, and financial analysis. The focus is to create more powerful and efficient quantum processing units by employing atomic ions for qubits.

  • Revenue Distribution: IONQ’s revenue streams are still nascent and have been evolving over the recent quarters. As quantum computing is not a mature market, revenue primarily comes from research and development contracts, licensing agreements, and access-to-quantum systems. They have very few customers so far and most of their revenues are from early access.
    • The business model is transitioning towards providing broader access via cloud platforms, though they still heavily rely on customized contracts and special client agreements. The company operates as a ‘pure-play’ quantum company and has no other sources of revenue except for quantum computation based systems and related offerings.
    • Recent growth trends in revenues have been positive, with sequential quarterly revenue increases due to increased engagements with quantum computing customers, but overall revenues remain low, given the nature of the industry.
  • Industry Trends: Quantum computing is a nascent but quickly evolving field. The industry is characterized by:
  • High levels of research and development.
  • Increasing private and public investments.
  • A large number of companies are trying to achieve market leadership at this stage.
  • Current demand is primarily from academic researchers and government institutions. * Commercial adoption of quantum computing is anticipated to grow significantly in the coming years. * Hardware companies are trying to diversify their systems by offering cloud-based access, and by offering different kinds of computing devices and quantum processing units that are specialized for different tasks.
  • Margins: Currently, profitability is not a primary focus for IONQ, as its major push is to increase the scale of their business operations. Gross margins have consistently been negative and negative cash flow is a continuous issue.
    • They have limited scale and production capabilities at this point in time.
    • Gross margins are expected to improve in the future, as the company increases its scale of operations and production efficiency.
  • Competitive Landscape: Quantum computing is a highly competitive field with established companies like Google, Microsoft, IBM, and Amazon, and many well-funded startups trying to achieve the same goals. Because the market is immature, the key battle at this stage is on performance and scale.
    • Unlike traditional processors, building a quantum computer requires expertise in multiple disciplines such as physics, material science, and software engineering, which makes the barriers to entry somewhat high. However, the industry is in its early stages of development, and new players are entering the field at this point.
  • What Makes IONQ Different: Unlike its major competitors who are using approaches such as superconducting qubits, IONQ uses a trapped ion technology based approach. The company highlights the advantages of the approach as stability, long coherence times, and high fidelity. It offers modular quantum processing units that can be scaled up.
    • According to the management, the company has an aggressive technology roadmap and intends to offer modularized quantum systems which are easily customizable. The other companies are mostly focusing on specific use-cases, rather than a generalized system with such capabilities.
    • IONQ has also partnered up with other companies such as Microsoft, Google, AWS, and Quantum.

Financial Analysis Based on the most recent quarterly results for Q3 2022, here’s a summary of IONQ’s financial performance:

IONQ is a pre-revenue company with limited commercial operations. So, it’s still unprofitable and heavily dependent on funding to run its operations.

  • Revenues: Total revenues were $10.6 million. This is mainly from research and development contracts, and is the primary source of company revenue. A majority of the revenues comes from just two major clients in the private sector. Revenues increased significantly by 258% YoY, primarily driven by the increase in revenue recognition from customer contracts, and the commencement of commercial revenue-generating activities of their systems.
  • Gross Margin: Gross margin is at negative $6.6 million, which is a significant increase YoY, though it still remains negative. They intend to improve upon this situation, by achieving economies of scale, as their business progresses.
  • Operating Expenses: Total operating expenses amounted to $26.7 million, a 48% YoY increase. This increase is directly related to high expenditure on R&D and G&A.
    • Research and development expenses totaled $16.1 million, while Sales & Marketing expenses totaled $3.8 million and General and Administration was $6.8 million.
    • R&D expenses is the largest chunk and it’s a significant part of their business operations.
  • Net Loss: Net loss was $31.2 million or $0.17 per share, which is a significant increase from the $15.5 million net loss reported in the prior-year quarter. The increase is mostly due to the increase in operating costs.
  • Balance Sheet Health:
    • Cash and cash equivalents amounted to $551.8 million as of September 30, 2022, a substantial sum of money.
    • They also have some short-term investments that can help with liquidity, totaling approximately $214 million.
    • Total assets were at around $584 million. They have a decent amount of assets given the pre-revenue state of the company.
    • Total liabilities are only around $60 million, which shows that they are not heavily debt-ridden, or at risk from debt payments.
    • Despite the solid asset base, and low debt, the company is still losing money rapidly, and if that does not change, they will require additional funding in the coming years.

The business is still in early stages of its development. It has to deal with heavy operational costs and negative cash flows.

Understandability

This business has been rated a 3 on the understandability scale. Here’s why:

  • While the underlying physics of quantum computing might be hard to grasp, the company’s business model is relatively simple. As a provider of hardware and services, it is somewhat easy to categorize.
  • There are not a lot of competing systems that are being offered in the market, as the industry is at an early stage. That might change soon as technology advances, and companies begin to standardize their systems.
  • The language of financial reports is easy enough to understand, but the fact that it is in early-stage makes it a bit hard to determine the core drivers of future revenues and profits, and the fact that it is a complex technology business.

Moat Rating: 1 / 5

Based on our analysis, IONQ’s moat rating is 1 out of 5. The justification is as follows:

  • Lack of Established Barriers: At this time, the quantum computing field is in its infancy, and there is not much to suggest that there are any established players who have developed some kind of sustainable business. It is extremely hard for any firm to lock-in customers.
  • No Strong Competitive Advantage: There is no evidence of any structural advantage in favor of IONQ. They are relying heavily on their R&D capabilities and hope that it will be a key differentiator and give them an edge.
  • Switching Costs & Network Effects are Limited: Since there are few to none customers, the switching costs are very low, or even non-existent. The userbase is very limited, and hence network effects are minimal. This might change in the future, but they are irrelevant as of today.
  • Limited Evidence of Sustainable Advantage: As it stands now, it is difficult to predict who will emerge as market leader in the future. And since the underlying technology is changing very rapidly, any sort of “advantage” will be very temporary in nature.
  • The Industry is Highly Competitive: Since this is a new technology with a lot of potential, the market is going to get very crowded and is very competitive. The incumbents have a large amount of experience and resources, and the startups have a lot of funding as well. This reduces the edge that any new-entrant might have in the industry.

Risks to the Moat and Business Resilience

IONQ and its operations are associated with several risks.

  • Technological Risk: Quantum computing is a field where technology is rapidly evolving. There is a possibility that IONQ’s core technology of trapped-ions may get surpassed by others.
  • Competition: This industry is highly competitive. While IONQ is trying to differentiate itself with their product offering, that won’t always guarantee success if their competitors come up with better or cheaper offerings.
  • Commercial Risk: It is important to know that commercial applications for quantum computing are still in early stages. It is not a guarantee that the use cases that are being currently focused on by them will generate a large stream of revenues in the future.
  • Financial Risk: Due to heavy operational costs, the company may face problems if they are not able to raise further funding. The company can only survive if there is sustained funding. At the end of Q3 2022, they had cash worth $551 million, but their cash burn rate was around $100 million a year. This means that they will have to raise funds in the next 5 years or less.
  • Reliance on a Limited Number of Customers: The company’s revenues are currently heavily dependent on a handful of major customers. If the demand from one of the customers ceases, then it can have a significant impact on revenues.
  • Dependence on Key Personnel: Since this is a new technology, the success of the firm is heavily dependent on the contributions made by its technical team and core leaders. The loss of key individuals may impede progress in the long run.
  • Regulatory Risk: As the company seeks to work with the Government and defense industries, they may face regulatory hurdles, changes in regulations, or new ones, which can impact the scope of operations and revenues of the company.
  • IP Risks: The Intellectual Property is very important in quantum computing and the lack of strong IP or having patents that are frequently challenged, may create more risk in the long run.

Recent Concerns and Management Response

  • The most important concern that they are facing at the current point is lack of consistent revenues and their high expenditure. However, the management has stated in their Q3 earnings call that they are confident that the R&D programs will lead to higher revenues, and that their sales strategy will yield positive results in the coming quarters.
  • They have tried to assure investors that they have a strong pipeline and are building relationships with prospective clients, which should translate into more revenues over time.
  • Also the company has stated that their production ramp has been delayed due to a variety of global issues, but their operations and financial conditions will not be majorly affected because of this delay.

In conclusion, IONQ is an exciting company in a developing industry, but it is far from developing any sort of sustainable competitive advantage for now, therefore their moat is rated as 1/5, on the lower end of the spectrum.