We scour the net for great ideas, so you don't have to
Claim this username to collect earnings from this post, and the portfolio!
May 8, 2022
[3 min Read]
The hedge fund Scorpion Capital came out with a short report about the IonQ corporation, alleging it is nothing but another SPAC fraud and no actual research is being done. After reading their report and doing fact checking of my own, I have sold short IonQ and give it a target price of zero.
Nominally, IonQ is making a "quantum computer" using suspended ions to act as quantum computer bits (qubits). There's been side work done with this over the decades, mostly by non-profit organizations and big universities, but this the first pure play quantum company. Quantum computers are theoretically better because key components only require a few particles and instead of just 1s and 0s, the bit can be both 1 and 0. Also information can be recorded in several different fashions, like a particle's spin, charge, ionization, etc. IonQ claims to have gone through 6 generations of functioning prototypes and is trying to miniaturize it.
Scorpion Capital claims to have spoken to two dozen former employees and say some were scientists hired on to give the project clout but quit when asked to lie. The first and most obvious reason to doubt the company's claims is the CEO said buying IONQ was "like buying Intel early on." (investment scammers always claim you'll get stupidly rich). Other employees claimed to have seen the device featured on their website, but it's an antique science experiment from the 80's or 90's. It is a quantum computer and does use suspended ions, but only has a few qubits and can't reliably add 1+1. Another employee said they tried asking about the devise because it didn't hold up to what they told the press, but the boss didn't like them asking questions or being challenged in any way.
Noteworthy is the company went public via SPAC, and just so we're clear; Yes that's how Nikola went public too.
A good point in Scorpion Capital's favor is they actually took the time to research and understand the science behind the devise, something lacking with most people who invest in technology I find. Existing quantum computers are measured in the number of qubits and the quality of those bits, as in the likelihood of an error in each calculation. In the quantum world there are no certainties, thus there's always a small chance each qubit will behave unexpectedly. Small errors compound with each iteration of processing, thus a 5% chance of error per qubit means that even basic calculations will be highly unreliable. It is possible to get around this by running the calculation many times as the average of all the answers will always be correct (kinda like how markets are efficient). However, this makes quantum computers more than 100 times slower than existing computers with an identical number of bits. Even so, the best modern quantum computers have dozens of qubits while a functioning computer would require millions.
I can add to this by a quote from one physicist who was asked why make quantum computers when they don't work. He replied "because it's fun." This is part of "pure physics" in what doesn't yet have a practical application but helps us understand the world around us. A recent REAL discovery occurred at university when researchers found that certain elements suspended atom-thin on a superfluid (liquid helium near absolute zero) can act as a diode. Diodes being a common electronic component that allow electricity to pass one way but not the other. The reason this works is these atoms break symmetry and can distinguish between movement in one direction versus the other. The researchers said frankly there was no practical application to this on account it had to be cooled to within a degree of absolute zero in order for the effect to be detectable. Realistically this principal will simply allow for new experiments that will let us understand the universe better and maybe one day will make an atom-thin diode that works at higher temperatures.
Even before the release of the short report, investment analysts gave it a poor review. Investor Place pointed out a cash burning company trying to grow in a high interest rate environment isn't a recipe for success since there's no guarantee they'll have a sellable devise before they run out of money.
After the short report, Bragar Eagel & Squire, a law firm specializing in shareholder rights, announced they were launching their own investigation into the company based on Scorpion's short report.
At this time, short interest is still modest, and I will be adding to my existing short position as funds come available. It'll take some time in order for the law to catch up to these jerkwads, but I'll watch it happen.