D-Wave Stock Finally Goes Public: What a Letdown

Imagine a cake that you were instructed to cut by an individual who would then choose which piece to take. Cutting the cake squarely down the middle would be the only way to ensure you received your fair share. Now, imagine you were cutting the cake for multiple individuals with different preferences – size of piece, amount of icing, etc. Figuring out a way to cut the cake while satisfying everyone’s desires is a problem so complex that computer scientists have been working on it for years.

“Envy-free cake-cutting” is just one of many computer science problems that have yet to be completely solved. It may sound trivial, but such a problem has many pragmatic use cases such as allocating ocean resources among countries. Finding a computer that can solve extremely difficult problems is one appeal of quantum computing.

Hardware vs. Software

Famed venture capitalist Marc Andreessen wrote in 2011 that software would eat the world. His prediction that software companies would be the next big opportunity came true with the emergence of firms like Amazon, Google, and Airbnb. Software-as-a–service (SaaS) is an entire business model that arose around companies that build disruptive software platforms. When we talk about quantum computing, we need to recognize that solving difficult problems doesn’t just come from developing a chip that operates at sub-zero temperatures. Equally important are improvements in software that tackle big problems. From our article on How Quantum Computing Software Gets Built:

During our conversation, Mr. Downs relayed to us an example of a top researcher at Microsoft – Matthias Troyer – who took a problem that would take 30,000 years to solve, then developed an algorithm to solve it in 30 years. Then most recently, announced that he developed an algorithm that can solve the same problem in minutes. Now that’s a quantum advantage.

Software is still eating the world to this day, and one recent example is AlphaFold from DeepMind that’s now predicting how proteins fold. No quantum computer needed.

As investors, we could care less if a company develops quantum computing hardware or software. We only care that some client – ideally a whole slew of clients – are willing to pay meaningful money for whatever technological innovation gets developed. Revenue is the arbiter of truth when determining which quantum computing companies have built something useful.

D-Wave Stock Goes Public

We had high hopes for D-Wave over the years having written a handful of popular articles about how retail investors might indirectly invest in the company. Our assumption was that “the world’s first quantum computing company” might be generating some meaningful revenues after having released “the world’s first commercially available 128-qubit quantum computer” more than a decade ago. Turns out we were wrong. The below chart was taken from the investor deck that accompanied D-Wave’s decision to go public using a special purpose acquisition company (SPAC) called DPCM Capital, Inc. (XPOA).

Why doesn’t D-Wave provide historical revenues? We have no idea, but they’re telling us that the forecast for this year – $11 million – would represent a growth rate of 119%. Based on those numbers, we can imply that D-Wave brought in a paltry $5 million in revenues for 2021 after having developed multiple versions of their quantum computer over the years including a 5,000-qubit model in 2019.

According to the company, about 50% of total revenues come from their primary business model – a cloud-based recurring revenue platform-as-a-service model – and the other half comes from professional services. So that’s about $2.5 million a year from the platform-as-a–service (PaaS) component of their business. (Remember these numbers.)

D-Wave’s investor presentation transcript goes on to talk about how they onboard clients through three phases of professional services:

• $50,000 for a two-month engagement to help customers understand which application or applications can most benefit from quantum systems.
• $350,000 for a five-month engagement to build out a proof of concept for one of those applications.
• $350,000 five-month engagement to help bring that application up in customer’s environment on a small scale; essentially, to do a pilot deployment.

So, onboarding a single client takes one year and generates $750,000 in revenues. After that, D-Wave moves the client into full production where they charge between $500,000 and a million dollars per year, per application. And this is where the first red flag becomes apparent.

If everything we’ve read so far is true, then how is it possible for the firm to only have achieved $2,500,000 in recurring revenues when their Leap cloud-based quantum application environment was released in 2018? If we assume they’re charging the minimum amount of $500,000 per annum for their platform, and also assume every customer is using one application, that means they only have five customers for a PaaS offering that’s been around for over three years. More importantly, how does this reconcile with the below statement taken from D-Wave’s press release on their SPAC debut (our emphasis in bold)?

D-Wave’s commercial customers include 25 of Forbes’ Global 2000 companies including industry leaders like Volkswagen, Toyota’s R&D Labs, Accenture, BBVA, NEC Corporation, Save-On-Foods, DENSO, and Lockheed Martin. In addition to the enterprise customers already actively using D-Wave, thousands of developers across the globe have built hundreds of early quantum applications in diverse areas that include resource scheduling, mobility, logistics, drug discovery, portfolio optimization, manufacturing processes, and many more. 

Something doesn’t add up here, especially considering that D-Wave claims on their SPAC deck to have over 100 customers.

Is everyone just kicking the tires? Are these on-boarding initiatives failing to bear fruit?

Looking to 2022

There’s no point in digging much deeper for several reasons. Firstly, the SPAC merger may not even happen as the broader investment community starts to adopt the stance we’ve taken from day one – SPACs Reward Everyone Except Retail Investors. Secondly, we need to wait until some proper regulatory filing documents are available so we have sufficient information to understand D-Wave’s business. For example, historical revenues would be quite telling for us to understand the pace of growth. Quarterly revenues can help us understand timing and progress being made towards their stated goal of $11 million revenues for 2022.

Let’s say D-Wave manages to do what most SPACs can’t and hits their forecasted revenue target – $11 million for 2022. Let’s also assume a 50/50 revenue split between platform and services along with minimum pricing ($500,000 per annum) and a minimum number of apps for each customer (1 app). That means D-Wave would go into 2022 with 11 customers. But it seems unlikely that clients are only being charged a minimum amount, or are only using one app, so there’s a strong likelihood that there’s some customer concentration risk here. We’ll only know when that information is made available in SEC filing documents.

The Importance of Revenues

There’s an entire contingent of wankers on Twitter with an atom in their profile signifying their undying allegiance to another self-described quantum computing leader – IonQ (IONQ). They’ll argue illogical points of contention like “contracts equal revenues” in a desperate attempt to ignore the lack of meaningful revenues for their sacred cow. Contracts, backlog, MOUs, and other labels of their ilk are not revenues. Only revenues are revenues, but even that statement comes with a caveat. We’ve pointed out how IonQ is being cheeky by charging the universities from which they spun out to access their laboratories, a subtle conflict of interest. Until commercial customers are willing to pay meaningful amounts of money to access quantum computing software or hardware, traction has not been demonstrated.

Conclusion

Until the three quantum computing stocks on offer – IonQ, D-Wave, and Rigetti – achieve meaningful revenues of $10 million per annum or more, we’re avoiding them. Also note that of these three names, only IONQ has managed to complete their SPAC so far. We also can’t ignore the large tech giants that have been sinking billions of dollars into quantum computing, not to mention the many quantum computing startups out there that have yet to show their cards. Like the promise of fusion, quantum computing is an extremely risky investment thesis because its technological capabilities are still in question.

Should the SPAC merger go through as planned, D-Wave stock will trade on the New York Stock Exchange under the ticker QBTS.

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