IBM (IBM 0.62%) and IonQ (IONQ -0.67%) are both investing in the long-term growth of the quantum computing market. While traditional computers process data as binary “bits” of zeros and ones, quantum computers process zeros and ones simultaneously as “qubits.” That approach makes quantum computers much faster than their traditional counterparts, but they’re larger, more expensive, and more prone to making mistakes.
As quantum computing technologies improve, those systems should gradually become smaller, cheaper, and more accurate. This makes them ideal for processing complex machine learning and artificial intelligence (AI) tasks.
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According to Acumen Research and Consulting, the quantum computing market could grow at a compound annual growth rate (CAGR) of 36% from 2023 to 2032 — and early movers like IBM and IonQ could benefit from that secular expansion. But should you invest in the blue-chip stalwart or the speculative newcomer?
How IBM is investing in quantum computing
IBM deployed the world’s first quantum computing system as a cloud-based service in 2016. Since then, it’s deployed more than 80 quantum systems which are used to run over 3 trillion programs on a daily basis. It also recently installed its Quantum System One system at Rensselaer Polytechnic Institute in Troy, New York. This is the first-ever installation of an IBM quantum system on a college campus.
IBM operates its quantum computing business as a freemium extension of its cloud ecosystem. It doesn’t disclose the exact revenue separately, but it’s likely insignificant compared to its larger software, infrastructure, and consulting businesses. In its latest 10-Q filing, IBM refers to quantum computing as one of its “next set of business opportunities.”
So for now, investors should focus more on IBM’s expansion of its hybrid cloud and AI platforms to offset the slower growth of its legacy software and hardware businesses. To drive that transformation, IBM divested its slower-growth managed infrastructure services unit as Kyndryl in late 2021, expanded its subsidiary Red Hat to wedge more open-source AI services between the public and private clouds, and restructured its business into three simpler units — software, consulting, and infrastructure — to generate “mid-single digit revenue growth” from 2022 to 2024.
That strategy has paid off. IBM’s revenue and adjusted EPS rose 6% in 2022 and 2% in 2023. From 2023 to 2026, analysts expect its revenue to grow at a CAGR of 4% as its EPS increases at a CAGR of 6%. Those growth rates are steady, its stock looks reasonably valued at 19 times forward earnings, and it pays a hefty forward yield of 4%.
How IonQ wants to revolutionize quantum computing
IBM’s individual quantum computing units (QPUs) are several feet wide. IonQ is trying to shrink those QPUs to just a few inches wide with its “trapped ion” technology.
Unlike IBM, IonQ is a pure play on the quantum computing market which generates all of its revenue from its quantum computing systems. It provides its quantum computing power as a cloud-based service to the U.S. military and large enterprise customers, and it gauges its total computing power in its proprietary algorithm qubits (AQ) metric. It reached AQ 29 in 2023, AQ 36 this January, and it plans to achieve AQ 64 by 2025.
At AQ 64, it claims its platform would be “100,000 times larger than the limit of a classical supercomputer simulation.” Looking further ahead, it aims to hit AQ 256 in 2026, AQ 384 in 2027, and AQ 1,024 in 2028. It believes it can achieve that rapid expansion by consistently miniaturizing its QPUs.
IonQ’s revenue rose from $2 million in 2021 to $11 million in 2022, then doubled to $22 million in 2023. Analysts expect its revenue to hit $153 million in 2026 — which would represent a CAGR of 91% from 2023. However, it’s expected to remain deeply unprofitable for the foreseeable future, and it isn’t a bargain at 12 times its projected sales for 2026.
Investors also shouldn’t ignore the other red flags. Back in 2022, the short seller Scorpion Capital accused IonQ of exaggerating its miniaturization capabilities and secretly using third-party quantum computers from Honeywell to provide its cloud-based processing services. A few months later, Dr. Chris Monroe — the company’s chief science officer who had developed the trapped ion technology which its entire growth strategy was built upon — abruptly resigned.
The better quantum computing play: IBM
IBM is growing slower than IonQ and hasn’t generated significant revenue from its quantum computing systems yet. However, it’s firmly profitable and supporting the future growth of its quantum computing systems by expanding its core businesses. As IBM locks in more enterprise customers, it will become easier to deploy its newer quantum systems.
IonQ’s technology sounds promising, but it’s richly valued, racking up steep losses, and faces troubling questions regarding its secretive miniaturization technologies. It might successfully scale up its quantum computing systems, but it’s still too speculative for my tastes. So for now, I’d stick with IBM — which seems like a better all-around investment and long-term play on the quantum computing market — than take a chance on IonQ.
