Earlier this week, Wall Street marked the third anniversary of the current bull run for the S&P 500. Although advancements in artificial intelligence (AI) have significantly contributed to the market’s surge, AI isn’t the only transformative force driving investor enthusiasm right now.
Both professional investors and individuals are showing immense excitement about the future of quantum computing, as reflected in the trailing-12-month (TTM) returns for these four leading pure-play companies:
- IonQ ( IONQ -4.04%): up 633%.
- Rigetti Computing ( RGTI -2.00%): up 6,770%.
- D-Wave Quantum ( QBTS -5.41%): up 4,330%.
- Quantum Computing, Inc. ( QUBT -1.23%): up 3,040%.
Despite these impressive, rapid gains for investors, these four quantum computing stocks are also sending a strong cautionary signal to Wall Street.
Image source: Getty Images.
What makes quantum computing stocks so appealing right now?
In simple terms, quantum computing leverages quantum mechanics and highly specialized machines to tackle problems that are far beyond the reach of conventional computers—at least within our lifetimes.
Just as the internet transformed both business-to-business and business-to-consumer markets, investors see quantum computing as the next technological leap that could revolutionize multiple sectors. For example, quantum-powered molecular simulations can help pharmaceutical companies quickly identify the most promising approaches to treating complex and life-threatening diseases.
Quantum computers also have the capability to break through current AI-driven cybersecurity systems, ultimately making them more robust. Additionally, this technology could accelerate the learning curve for AI algorithms, boosting the performance and adoption of AI-based software.
Beyond these practical applications, Wall Street and investors are drawn to the expanding market potential for quantum computing. Boston Consulting Group estimates that quantum computing could add between $450 billion and $850 billion to the global economy by 2040, while The Quantum Insider projects that the industry could generate $1 trillion in worldwide value by 2035.
Several pure-play quantum computing companies are also collaborating with some of the most influential firms on Wall Street. For instance, both IonQ and Rigetti Computing’s quantum computers are available through Amazon’s Braket quantum computing service.
With this momentum, shares of IonQ, Rigetti, D-Wave, and Quantum Computing, Inc. have soared. But despite these remarkable returns, there may be underlying issues investors shouldn’t overlook.
Image source: Getty Images.
Investors shouldn’t ignore this $875 million warning sign on Wall Street
While investors often focus on earnings, executive commentary, and company presentations to assess a business’s outlook, insider trading activity can also provide valuable insight.
An “insider” refers to a senior executive, a board member, or anyone who owns at least 10% of a company’s shares. These individuals often have access to information not available to the public and typically understand their company better than any analyst or retail investor.
Insiders at publicly traded firms are required to submit Form 4 to the Securities and Exchange Commission within two business days of any trade, whether they’re buying, selling, or exercising options. This ensures full transparency for all insider transactions.
A review of insider trading over the past five years (or since the companies went public) reveals a concerning trend for investors in these quantum computing leaders:
- IonQ: $569,934,078 in net insider sales
- Rigetti Computing: $50,124,972 in net insider sales
- D-Wave Quantum: $221,687,659 in net insider sales
- Quantum Computing, Inc.: $33,245,464 in net insider sales
Together, insiders at these four quantum computing companies have sold a combined $875 million worth of their own stock over the last five years.
To provide some context, it’s important to note that executives and directors at public companies often receive compensation in the form of shares and options. To cover federal or state tax obligations on this compensation, it’s common for them to sell some of their stock.
Therefore, insider selling isn’t always a negative sign. Selling shares for tax reasons or to diversify one’s portfolio is generally not a cause for concern among investors.
However, there’s typically only one motivation for insiders to buy shares: confidence that the stock will appreciate. All four of these quantum computing companies have seen little to no insider buying. In fact, Quantum Computing, Inc. hasn’t had any insider purchases, and D-Wave Quantum’s last insider buy was over three years ago. If insiders aren’t investing in their own companies, why should outside investors?
This ongoing lack of insider buying, combined with consistent selling, makes the warning signs around quantum computing stock valuations even more pronounced.
It’s not unusual for stocks at the forefront of emerging trends to command high valuations, but the TTM price-to-sales (P/S) ratios for quantum computing companies are exceptionally high and historically unsustainable. No leading innovative company has ever maintained a TTM P/S ratio above 30 for long, yet IonQ, Rigetti Computing, D-Wave Quantum, and Quantum Computing, Inc. currently have TTM P/S ratios of 340, 1,796, 494, and 10,250, respectively!
This collective $875 million in net insider selling stands as another clear warning to Wall Street that the meteoric rise in quantum computing stocks may not be sustainable.
