IonQ's Acquisitions Could Cement It as the Top Quantum Defense Stock

Key Points

• IonQ secured some big government contracts over the past year.

• It also acquired two of its peers to expand its presence in the defense industry.

• It launched a dedicated division, IonQ Federal, to handle those government contracts.

• 10 stocks we like better than IonQ ›

Quantum computing and defense stocks attract different types of investors. Pure-play quantum computing companies -- which are often unprofitable and trading at sky-high valuations -- tend to attract growth-oriented investors. Big defense companies are usually profitable, but they grow at a slower rate and are more appealing to value investors.

However, these two industries are converging as some top quantum computing companies expand into the defense sector. One of those companies is IonQ (NYSE: IONQ). Let's review what IonQ does, how it's ramping up its presence in the defense sector with contracts and acquisitions, and how it might evolve into a top "quantum defense" stock.

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What does IonQ do?

Quantum computers can store zeros and ones simultaneously in qubits. Being able to do this helps them process calculations at an exponentially faster rate than traditional computers, which store those zeros and ones separately in binary bits. However, quantum computers are also larger, more expensive, and consume more power than traditional computers. The ones currently in use also tend to output a higher ratio of errors than their traditional computer counterparts. As a result, they're still primarily used for niche research projects at universities and government agencies.

Many quantum computers are powered by electrons (subatomic particles with a negative charge), which are sped up through "superconducting loops" to process data. These chips are relatively easy to manufacture, but they're also expensive to operate because they can only function in cryogenic environments. Companies like IBM, Rigetti Computing, and D-Wave Quantum all use superconducting loops in their quantum systems.

Instead of using electrons, IonQ -- as its name suggests -- traps ions (individually charged atoms) within electromagnetic fields and manipulates them with tiny lasers to process data. These systems aren't encased in big refrigerating systems because they don't need to be chilled to cryogenic levels, but their lasers still need to be recalibrated.

So while its systems are smaller and more scalable than electron-based systems, they're also harder to manufacture, more fragile, and require constant maintenance from highly trained laser technicians. IonQ currently sells three trapped ion quantum systems: its original Aria system, its flagship Forte system, and its Forte Enterprise system for data centers. It plans to launch its fourth system, the Tempo, by the end of this year. It also serves up its computing power as a cloud-based service.

From 2024 to 2027, analysts expect IonQ's revenue to surge more than sevenfold from $43 million to $315 million as it sells more systems and locks more customers into its cloud services. But it won't turn profitable anytime soon, and it isn't cheap at 67 times its projected sales for 2027.

How is IonQ expanding its presence in the defense sector?

Over the past year, IonQ secured three major defense contracts:

1. A $54.5 million contract with the U.S. Air Force Research Laboratory (AFRL) to upgrade the scalability and deployability of its quantum systems.
2. An additional $21.1 million project with the AFRL to develop secure quantum networking infrastructure.
3. A $5.7 million contract with the Department of Defense's Applied Research Laboratory for Intelligence and Security to design a new networked quantum computing system with tighter cybersecurity standards.

To support that growing business, IonQ acquired two of its industry peers. Earlier this month, it closed its acquisition of Oxford Ionics -- another major player in the trapped-ion computing space -- for $1.08 billion. It also entered an agreement to acquire Vector Atomic, which develops quantum sensing tools used in national security applications, for an undisclosed amount. Vector has already secured more than $200 million in defense-related government contracts.

IonQ even launched a new division, IonQ Federal, to handle all of those contracts earlier this month. In a statement, CEO Niccolo de Masi said the formation of that new division "will provide our government customers with additional dedicated resources committed to the further application of quantum computing and quantum networking solutions across their programs." Robert Cardillo, the newly appointed executive chairman of IonQ Federal, said its defense customers will "leverage IonQ's leadership in quantum computing and networking to create interoperability standards that strengthen national security and prosperity in this rapidly evolving geopolitical environment."

Will IonQ evolve into a top "quantum defense" stock?

Many investors are focused on the escalating tech war and intensifying AI arms race between the U.S. and China, but the emerging quantum computing market could become the next big battleground. IonQ has already established an early-mover advantage in the "quantum defense" niche with its big contracts, acquisitions, and its dedicated federal division, and its expansion into that nascent market could help it grow into its premium valuations over the next decade.

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Leo Sun has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends International Business Machines. The Motley Fool has a disclosure policy.