In a recent client training session, we analyzed the future cash flow expectations baked into Quantum Computing Inc. (QUBT), one of the most popular stocks in the market these days.
What we found might shock you. I know I was surprised to see just how much future success was priced into QUBT.
We’ve Seen this Movie Before
The problem with QUBT and other quantum computing stocks is the same problem we all saw with internet stocks, social media stocks, blockchain stocks, and AI stocks. In the early stages, they are all priced as if they will be the winner, there will not be any real competition, and the companies will enjoy outrageously high profits while the rest of the world stands and watches in awe.
The Fallacy of the Prevailing Narrative
Just as we explained in DeepSeek Is a Wake-Up Call for NVIDIA and Other Hype Stocks, disruption is more the rule than the exception in modern business, especially in the tech world. The early leaders in a new trend are rarely the long-term winners. So, anytime stock valuations get to the point where they are embedding monopoly-level revenue and margins, investors should slam on the brakes.
The Honest Narrative on QUBT
As we do for all of our Reverse DCF Case Studies, we use our models to quantify the future performance of the company required to justify the current stock price.
Specifically, our model shows that to justify ~$10/share, Quantum Computing would have to:
- grow revenue at 256% compounded annually for 6 years while also
- improving its return on invested capital (ROIC) from -31% to 164%, or higher than Google (GOOGL), Meta (META), Amazon (AMZN), Apple (AAPL), Microsoft (MSFT) or Amazon (AMZN).
I think it is fair to say that this stock has shockingly high expectations for future cash flows embedded in its stocks price. Keep in mind, we are not saying the company will not meet these expectations. We are telling investors what hurdles the company must clear for the stock to be fairly valued at its current price.
To be clear, an investor would 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.
Explaining the Market-Implied GAP
At the end of the training session, we tie this reverse DCF analysis back to our Stock Rating for the Market-Implied Growth Appreciation Period (GAP) for QUBT.
So, be sure to watch to the end if you’re interested in how this important criteria works. Note, we did a special training on how this criteria is a good predictor of future stock price performance.
More Honest Narratives
With our 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 sign up to 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 that 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 January 31, 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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