Is IonQ Worth The Leap?

Quantum computing is in its infancy; but with its long-term promise, this remains one of the most exciting potential investment markets of tomorrow. Two of today’s sharpest market observers – Matthew Castel of the Toronto-based Logos LP and Simon Erickson, founder and CEO of 7investing – look at the risk and reward of IonQ, soon to be the first NYSE-listed pure play in this emerging field.

What was particularly exciting about this year’s March technology selloff was the opportunity to evaluate smaller capitalization stocks set to benefit from significant structural changes in the economy trading at more reasonable prices.

One such stock we purchased in the quarter is dmy Technology III (DMYI). This is a SPAC launched by dmy Technology Group Inc. (one of the more reputable SPAC sponsors) that will soon merge with IonQ (will trade under the symbol IONQ).

This will make IonQ the first ever publicly traded pure-play quantum computing business on the NYSE. Why invest in quantum computing? “This is going to be the decade in which quantum really comes of age,” an IBM
executive recently told the Wall Street Journal.

Quantum computing is to artificial intelligence what nuclear weapons are to bombs. Corporates, institutions and other entities are thus racing to build such a new type of computer, a quantum computer, that will bring the computational hardware required to match and exceed the human brain.

This will require the computation of models 1,000x larger than OpenAI’s massive GPT3, or 100x larger than Google’s
recent 1T parameter leviathan.

While quantum technology will take years to scale, the race is on to build the software and hardware infrastructure today. The race to such technology will be a defining theme of the decade to come and the stakes could not be higher. The current CEO of Google, Sundar Pichai, has said that the impact of AI will be more profound than man’s discovery of fire.

Palantir’s CEO recently stated that: “Military AI will determine our lives, the lives of your kids. This is a zero-sum thing. The country with the most important AI, most powerful AI, will determine the rules.”

If (in the words of Ray Dalio) the Federal Reserve’s printing press is the world’s most valuable asset, the world’s first scaled-up quantum computer and/or generally intelligent AI would be a close second.

Enter IonQ.

IonQ started as a research project about 10 years ago (as a business about 6 years ago) by Chris Monroe (head of quantum physics at the University of Maryland, College Park) and Jungsang Kim (Professor of Quantum Physics and Electrical Engineering at Duke University, formerly of Bell Labs) who wanted to build the most powerful quantum computer using trapped ytterbium atoms, a unique method that reduces the overall space required to create a quantum computer without seeing loss in quantum power.

This is an interesting method because unlike other methods (ie. those done by Google, IBM, Rigetti etc.), the trapped-ion method comes from nature and builds quantum qubits on a small chip (Honeywell, who also realized the power of quantum, is also using an ion method).

Despite the other methods of building a quantum computer, there are several unique advantages of the trapped-ion method including low error correction, high gate fidelity, scalability (although scalability overall is still an issue), noise reduction and lower costs to operate (other methods require tremendous electrical and refrigeration costs).

The reason IonQ has gained traction and attracted capital is three-fold:

  1. IonQ has the most advanced quantum method on quantum volume alone;
  2. They have attracted the best business and technical minds of any quantum computing business to date;
  3. Their long-term business model revolves around Quantum Computing as a Service and managed services (their QCaaS currently charges roughly $10 per compute hour on AWS and Azure).

On the talent front, both Mr. Monroe and Mr. Kim are two of the best minds in quantum physics and have a combined 51,000 academic citations in the area. In fact, Dave Bacon, who was head of Google’s quantum division and one of the authors of the Bacon-Shor quantum algorithm, left Google to join IonQ. Peter Chapman is the current CEO of IonQ (former MIT grad and son of a NASA astronaut) and is the former head of engineering at Amazon

From a capitalization perspective, the business raised $650 million (roughly $350 million in a PIPE and $300 million through the SPAC) at an enterprise value of $1.95bn ($10/share for DMYI).

Although not an exhaustive list, the PIPE investors include some of the biggest investors in the world: Breakthrough Energy (Bill Gates), TIME Ventures (Marc Benioff), MSD Capital, Silver Lake Partners, Fidelity and Hyundai. Existing investors include but are not limited to Amazon Web Services, Bosch, Samsung Ventures, Tao Capital, Lockheed Martin
, Airbus Ventures and HPE Ventures.

Currently, the business’s quantum service is the only one available on both AWS and Azure and once merged, they will end up being the most well-funded standalone quantum business.

Their investor base will also be the business’s first customers (Samsung, HPE and Airbus have already publicly committed to using their services for real-world applications) and Dow Chemical has recently used their service to recreate the water molecule.

Despite our excitement about IonQ’s prospects, this is a very long-term investment for the LP as there will be multiple phases before we see broad commercial use of quantum computing (early on its S-curve growth runway).

There are still significant technical barriers to the technology, the most important being error correction, error modification and scalability.

Currently, the ion-trap method uses a significant number of lasers to manipulate the ytterbium atom, which is something that is not sustainable long-term. These technical barriers must be fixed and enhanced over the next few years before they can use their technology for broader commercial applications.

From a business perspective, we will need to see the creation of a flywheel over time (acquisition of software, security services, developer portals etc.) to continue to attract talent and provide top notch customer service, just like Amazon has with AWS. 

It was big news last month for anyone who follows the semiconductor industry. IonQ will be coming public via SPAC, through a merger with dMY Technology Group Inc. This will now be the world’s first publicly-traded quantum computing company.

At first glance, this looks like a massive bubble might be forming. The combined entity is expected to have a valuation of $2 billion. However, IonQ won’t have a commercially available quantum computer ready until 2023 and is still doing just $1 million in total revenue. That means the company is coming public at a nosebleed multiple of 2,000 times sales.

Today, quantum computing is still just a science project. It’s similar to biotech companies, who are pursuing innovative science but are still years away from bringing anything to the market. At $2 billion, there are a lot of hopes and dreams baked into that frothy IonQ valuation.

But before we completely write this one off, let’s dig deeper into why there’s so much optimism about quantum computing right now. At its core, this is a story about the anticipation of disruptive innovation.

Disruption describes when technologies are introduced that are fundamentally different than what the incumbents are using today. You can think about the lightbulb as an example of disruptive innovation. It wasn’t just a bigger and brighter candle. Instead, it used electricity passed through resistant filaments to provide a steadier and more dependable form of light.

Quantum computers themselves are disruptive innovations. They aren’t just faster computers, but are being developed specifically to solve problems that traditional computers cannot.

Calculations that involve millions of inputs would take thousands of years for today’s processors to compute. Instead of using 0s and 1s of binary data, quantum computers use qubits with superposition principles. Instead of running code in series, entanglement allows for much more efficient processing.

There’s some really neat science that’s in the works here. The Cliff’s Notes version is that quantum is Microsoft
Excel’s “Goal seek” on steroids. It can optimize an output based upon millions of inputs. Think about how easy it would be to solve a maze if you could immediately see all of the dead-end paths in advance.

And in addition to their different architecture, just imagine what disruptions quantum computers could unlock in the commercial world.

They could render many of our “current ways of doing things” obsolete. The ability to solve unsolvable problems could quickly turbocharge fundamental science. For those developing materials, they could model superconductors that optimize electrical transmission.

For drugmakers, they could simulate and solve the problems of protein folding. For automakers, they could design longer-range batteries for electric vehicles. And just imagine all of the applications they could unlock with blockchains.

The ability to create these “modern lightbulbs” is the promise that quantum holds. Research firm Gartner
believes that by 2023, 20% of global organizations are expected to budget for quantum-computing projects. That’s up from less than 1% in 2018 – which would be a 20-fold increase across the board in just five years.

That’s quite a forecast to make. And if it’s even directionally-correct, we’ll soon be witnessing a hockey-stick growth rate that the business world hasn’t seen since it embraced the internet.

Buckle up, because things are about to get interesting. There are several different quantum computing approaches (ion trapping, annealers, optics) being pursued by several different vendors (IonQ, D-Wave Systems, PsiQuantum). The competition is going to become intense. And we will almost certainly see more companies raising funds in the public market.

[Watch Live] Learn How to Invest in Disruptive Innovation: 7investing founder and CEO, Simon Erickson, will lay the foundation of disruption and provide several publicly-traded companies serving as textbook examples at next week’s MoneyShow Virtual Expo streaming live on May 11-13, 2021. He will also share his thoughts on the sectors of the market that are actively being disrupted and how these could provide significant rewards for early and perceptive investors.

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