Summary
Quantum computing's potential lies in its ability to perform complex computations exponentially faster than traditional computers, with Rigetti aiming to provide a full-stack quantum computing system.
Despite promising advancements and government contracts, Rigetti's financials remain weak, with no immediate profitability and a need for significant sales growth.
Long-term prospects are optimistic, but significant share dilution could occur in that time.
Given the high risks and long-term horizon for quantum computing's commercial viability, I rate Rigetti as a Hold until financials improve or the price lowers.
Thomas Barwick/DigitalVision via Getty Images
Rigetti Computing (NASDAQ:RGTI) has come to the attention of many recently, after the share price surged over the past month.
RGTI 1M Price History (Seeking Alpha)
This rally occurred only weeks after its $100M ATM equity raise. While issuing new shares would normally reduce value, this was followed just weeks later by a favorable breakthrough. Paired with other favorable developments in the quantum space, the share price has almost quadrupled in the past month.
With the share price over $11 and the market cap over $3B, we ask if there is still opportunity. As with my recent coverage of Quantum Computing (QUBT) (another quantum stock that rallied), my aim here is to create a simple-as-possible thesis for investors who aren't versed in tech but still want a chance to ride whatever growth there may be.
For now, I think RGTI is too early, with too much risk of dilution, to be a Buy, but its long-term upside at least makes it a hopeful Hold.
The Quantum Opportunity
Let's talk for a moment about what quantum computers are and why they matter.
Traditional computers run on binary, the 0s and 1s we've come to understand. It's effectively an alphabet with two letters. Quantum computers put the concept of Schrödinger's cat into use, where the simultaneous state of 0 and 1 are possible. While this is a very simple way of explaining it, just try to imagine how much more useful an alphabet becomes when it moves from two letters to three.
November 2024 Company Presentation
Quantum therefore becomes exponentially more useful at scale in computations over traditional.
Rigetti's Role
Rigetti runs a vertical business model, aiming to provide "full-stack quantum computing system." This entails:
Chip manufacturing
Sales of QPUs
Use of their quantum computers (through cloud)
Quantum software platform
Like QUBT, they hold the distinction of owning their own fab for chip production. Unlike QUBT (whose real prize is in imaging), they are taking a more general approach to the technology.
November 2024 Company Presentation
They are currently working to overcome the different challenges that will take quantum far enough to become commercially viable. This is why, for example, the market responded favorably to the breakthrough I mentioned before. It entailed the first successful use of AI to calibrate a quantum computer. To quote their press release:
“These results demonstrate the remarkable potential of AI-powered calibration tools in quantum computing,” said David Rivas, CTO at Rigetti Computing. “Using automated processes, both Qruise and Quantum Elements achieved performance levels matching our rigorous system specifications – work that can require weeks of manual tuning by a skilled engineering team. As we advance toward larger qubit counts, having validated that AI tools can reach our performance benchmarks is an exciting moment for the industry. This successful demonstration shows how automation accelerates quantum computer setup while maintaining the exacting standards required for quantum computation. We look forward to seeing these tools used by our customers who have both our Novera QPU and Quantum Machines’ control.”
Thus, 2023's explosion of generative AI is directly feeding into the advancement of quantum technology. The interesting result here is that quantum is likely to provide a role in supporting the developing AI further, particularly as it applies to machine learning. For example, in the 2023 Form 10K, management notes:
We already see emerging machine learning algorithms that take advantage of the unique capabilities of quantum computing to tackle the complex linear algebra problems at the heart of many machine learning tasks. In fact, recent research has emerged demonstrating that quantum algorithms could work better than classical ones for critical machine learning classification problems.
Management posits this having a wide variety of uses cases, such molecular science for drug development, fraud detection, enhancing low-resolution images into high, and so on.
There remain, however, more hurdles to cross before quantum computers provide profitable value. Rigetti company began commercial sales with their release of Novera last year, a 9-qubit chip capable of performing high-speed, 2-qubit operations and testing for single-qubit operations.
November 2024 Company Presentation
Novera is based on the architecture for their Ankaa system, which they began selling as a cloud service to customers in 2023 as well.
Management has also spent much of this year investing in its sales and marketing team. CEO Subodh Kulkarni did speak optimistically during the Q3 earnings call about the potential sales going forward:
So we certainly think as hardware continues to improve as the next year goes on we will continue to get better and better opportunities with government customers but also some commercial, research-oriented type customers.
I believe the "commercial, research-oriented" detail to be important. Right now Rigetti enjoys government contracts. Gaining a more a commercial appeal will be a signal that their technology is value-creative in a way that a traditional computer would not be for that customer. Yet, the research component is important as well, as it means such commercial customers would initially be ones with a niche interest in quantum computing.
As such, I don't expect sales growth to be phenomenal in the year to come, certainly not to the point that they generate positive cash flows. On that note...
Financial Outlook
As one might guess from a company that just raised $100M in capital from new shares, Rigetti is not currently profitable.
Income Statement (Q3 2024 Form 10Q)
YTD revenues are essentially flat, year-over-year. RGTI's rally this month isn't because of vastly improved financials in recent times. It is as hope-driven as a rally can be.
Balance Sheet (Q3 2024 Form 10Q)
With the YTD losses around $50M, the company does at least have ample liquidity for the near term. In the earnings call, management guided that it should be sufficient for their needs until early 2026, and this was before the $100M was raised!
Does this mean that we just have to let them invest the money, wait, and then we're sitting on a big winner? We might hesitate to conclude that, given how Kulkarni also remarked about the five-year revenue outlook:
So if you take a look at our investor presentation, we cite the $7.6 billion number that IDC has in about 5 years time period, again primarily government, national labs and research-oriented customers. At least in the next 5 years, we believe a sizable part of that market is going to be on-premise quantum computers and a smaller part will be quantum computing as a service.
That's not expected revenue, though. That's the five-year TAM. Sure, we can imagine Rigetti getting all of it, but even realizing strong margins would make the current valuation near $3B tough to justify.
Yes, in their SEC filings, management references research that suggests the quantum computing TAM will be in the hundreds of billions by 2035. Thus, someone who buys today and is extremely patient might be able to enjoy that upside. They may also have their piece of the pie diluted by additional share offerings, offsetting their early advantage.
For now, Rigetti still needs to solve certain scaling issues that would make quantum superior to traditional computers for large customers that could give them big contracts. As such, I expect the cash flow situation to be one of treading water for the next few years.
Conclusion
In my view, it's very conceivable that RGTI could prove to be big win to those who buy today and wait very, very patiently. In fact, whenever I rate a stock as a Buy, I try to imagine that we could have it for as long as ten years. That usually entails multiple outs, however, such gradual capital appreciation, lucrative dividends, or maybe a tender offer at an attractive premium.
With Rigetti, there are promising seeds of a product-and-sales process that can bring quantum computing into the wider world, but I only see that possibility materializing at the tale-end of the decade for now, with plenty of risks along the way that a company needing to raise cash will face.
For that reason, I think the current price could only be fair at best. I'm giving it a Hold until a lower price returns or until a material improvement in the financial situation warrants greater optimism.