Why Did IonQ Stock Tumble 14% in June?

Shares of IonQ (IONQ 3.51%) fell 13.7% last month, according to data provided by S&P Global Market Intelligence. The quantum computing stock moved lower as headlines touted potential competitors and investors adjusted their interest rate expectations. There were virtually no changes to analyst forecasts and recommendations during the month, but some investors clearly recalibrated their risk appetite and sold shares.

It doesn’t take major news to move IonQ stock

IonQ is an expensive growth stock that’s prone to large price swings. That volatility is quantifiable — the stock’s beta is high at 2.26. That can translate to large potential moves without meaningful news.

Nvidia made headlines last month with reports that it was accelerating quantum computing operations. That development doesn’t directly impact IonQ, but reminds shareholders about potential risks.

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IonQ’s products are still a long way from widespread commercial adoption, and the eventual industry winners remain to be determined. The company will need to compete for market share with a variety of deep-pocketed tech giants, such as Microsoft, Alphabet, and Nvidia. Start-up competitors will also inevitably join an emerging, lucrative industry.

In short, IonQ has enormous potential along with major uncertainty, forcing investors to take a leap of faith. The company produces very little revenue, focusing instead on product development — it spent nearly $35 million on R&D and capitalized software development expenses last quarter. That’s fine for an organization at this stage of the corporate life cycle, but its valuation is based on long-term potential rather than medium-term fundamentals.

High-beta stocks can take big steps downward from relatively benign headlines, and concerns over competitive risks are a common catalyst. IonQ stock and Quantum Computing followed a similar path last month, illustrating the downside of speculative volatility.

The stock is highly sensitive to interest rates

IonQ also dealt with unfavorable headlines related to Federal Reserve policy in June. The company reported just over $20 million in free cash outflow last quarter. There’s less than $400 million in cash and other liquid assets on the balance sheet, implying a cash runway of less than two years.

Revenue growth could extend that runway, but it’s likely that IonQ will need to issue debt or new shares in the future. New financing isn’t inherently negative, but it increases interest rate sensitivity.

Last month, the Fed announced that it was keeping interest rates steady and signaled that one rate cut was likely later this year. Investors had previously expected three rate cuts this year, and there was lingering hope that the central bank would communicate a more accommodating path for the second half of 2024. June’s Fed announcement dashed those hopes, prompting investors to revise their allocation models.

High interest rates increase borrowing costs, hinder employment, and discourage investor risk. IonQ will likely need to deal with capital markets to raise additional funding in the next two years. The latest Fed commentary suggests that IonQ’s cost of capital will be higher than previously anticipated.

On top of that, high interest rates tend to hurt growth stocks. IonQ’s price-to-sales ratio is around 60, which is exceptionally high. Investors aren’t so willing to pay a premium for speculative assets when rates are high, so the Fed news wasn’t helpful.

Long-term IonQ bulls shouldn’t have their opinion swayed by anything that happened last month. However, what happened in the month of June illustrated the volatility that they can expect moving forward.