When you’re analyzing stocks in emerging industries like quantum computing, putting context around the future cash flows baked into the current stock price can be very illuminating. In fact, doing so can make seemingly impossibly high future cash flow expectations seem possible.
Step 1: Expectations Investing Analysis on IONQ
As we do for all of our Reverse DCF Case Studies, we used our model to reveal that to justify ~$38/share, IonQ Inc would have to:
- grow revenue at 43% compounded annually for 21 years while also
- improving its return on invested capital (ROIC) from -41% to ~534%, or higher than any company in the S&P 500 right now.
Very few companies have ever achieved a 500%+ ROIC, and none have been able to maintain it for more than a year or two. Those are some high expectations, for sure.
Read on and watch my video to see how high these expectations are compared to other companies.
Step 2: Expectations Investing Analysis on IONQ
After quantifying the market’s expectations for future cash flows, the next step in Expectations Investing is to determine whether one thinks those expectations are:
- Too high (sell)
- Too low (buy)
- About right (hold)
The best way to assess how high/low the expectations for future cash flows are is to compare them to the current cash flow of other companies, e.g. the companies in the S&P 500.
That’s exactly what we do in this private training session that we are sharing today. We show you how to use our powerful Dynamic Data Screener (available to Institutional clients) to quickly see how the market’s expected revenue and net operating profit after-tax (NOPAT) for IONQ rank compared to S&P 500 companies.
And, the answer is, IonQ’s implied
- revenue of $42.5 billion ranked around 80th in the S&P 500
- NOPAT of $7.3 billion ranked around 60th in the S&P 500.
When I see the expectations for future cash flows for IonQ benchmarked in this way, I think it might be possible for the company to beat those expectations. If IonQ is one of the big winners in the quantum computing space, it seems very reasonable that the company could exceed the revenue and NOPAT levels of S&P 500 companies ranked in the 60s and 80s.
I am not saying it is likely, but that it seems possible, much more possible than I thought when I only looked at the 43% revenue CAGR and ROIC going from -41% to 534%.
To be clear, an investor would still have to believe that the company’s future performance would be significantly better than what’s baked into the current price to believe there was material upside in the stock.
More Expectations Investing Case Studies
With our reverse DCF model, it’s easy and only takes a few seconds to quantify the impact of anything that affects future revenues, margins, and cash flows.
If you’re interested in seeing more examples of how our DCF model works, I recommend checking out the Reverse DCF Case Studies here in our Online Community. To join our Online Community, complete this form.
Our community is free to join as is access to the Reverse DCF case studies.
How To Avoid the Landmines
Whenever stocks get super expensive, it is only a matter of time before they fall back to earth as the law of competition inevitably proves the expectations for future cash flows to be overly optimistic.
We have multiple Model Portfolios, including our Zombie Stocks list, to warn investors of stocks to avoid and alert them to stocks that get our Attractive rating. We also provide best-in-class ratings for stocks, ETFs, and mutual funds.
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This article was originally published on February 4, 2025.
Disclosure: David Trainer, Kyle Guske II, and Hakan Salt receive no compensation to write about any specific stock, style, or theme.
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