Rigetti Computing Stock: A Risky Bet on Quantum Computing

The value of something is simply what others are willing to pay for it. Value stocks represent cash-generating assets that grow slowly over time, while growth stocks promise rapid growth into the future. Lately, the value of future growth has been falling. With interest rates rising, the value of a dollar today is becoming more valuable than a dollar promised tomorrow. When it comes to growth stocks, we can categorize them as follows:

  • Growth stocks with a track record of meaningful revenue growth
  • Growth stocks with no meaningful revenues

The second bullet point represents companies we don’t consider investable. In that category we would place the latest quantum computing company to go public, Rigetti Computing (RGTI), which is now publicly traded following their successful merger with a special purpose acquisition company (SPAC) called Supernova Partners Acquisition Company II.

About Rigetti Computing Stock

Click for company website

The last time we looked at Rigetti was in a piece titled Rigetti Computing Stock: A Pure-Play on Quantum Computing in which we noted 2021 revenues coming in at $5.54 million. It’s a start, but they’ll need to clear $10 million per annum before we would consider revenues meaningful, and we’re told that’s expected to happen this year with 2022 revenues estimated at $18 million. But they’re not off to a good start with Q1-2022 revenues of just $2.1 million, down from $2.36 million in the year prior. The company attributed the drop in revenues to contract timing, something that will continue to result in lumpy quarterly revenues as they expect to continue generating the majority of revenues from development contracts over at least the next several years.

To make revenues even more unpredictable, there’s customer concentration risk – 83% of Q1-2022 revenues came from three customers (Q1-2021 saw 81% of revenues from two customers).

Rigetti computing total Revenues Q1-2021 and Q1-2022
Credit: Nanalyze

Like Palantir, Rigetti derives a significant amount of revenue from contracts with U.S. and foreign governments and government agencies. Around 60% of 2021 revenues were from governments with the number reaching 76% in Q1-2022.

The SPAC Rigetti merged with charged a healthy 14.44% in fees, leaving the company with $225.6 million in proceeds, a disappointing number because they were expecting over twice that amount. As of Q1-2022, Rigetti was holding around $206 million cash with debt of $32 million. If they’re burning about $10 million per quarter, then their runway is a healthy five years. And with their timelines slipping, they’ll need all the runway they can get.

Slipping Timelines

The company’s pessimism around achieving quantum greatness is pervasive throughout the latest 10-Q. Because of inflation, labor shortages, supply conditions, and what they perceived as a lackluster SPAC offering, the company’s milestones have slipped. Rigetti now plans to “introduce a 1,000+ qubit system in late 2025 and 4,000+ qubit system in or after 2027.” We don’t know how that impacts the glossy SPAC deck projections of $288 million in revenues by 2025, and the accompanying profitability, but you can be sure they’ll be burning through lots of R&D cash to bring these systems to market.

Rigetti's glossy SPAC deck projections of $288 million in revenues by 2025,
Credit: Rigetti

And if history repeats itself, then don’t hold your breath. From the horse’s mouth:

We have in the past failed to meet publicly announced milestones and may fail to meet projected technological milestones in the future. For example, in 2018, we announced that we planned to build and deploy a 128-qubit system over the subsequent twelve months, but have not to date built a 128-qubit system.

Rigetti 10-Q

At least they admit their inability to execute. This weak vote of confidence from management, coupled with revenue concentration risk, a heavy reliance on government contracts, and a lack of meaningful revenues, means this is a quantum computing stock we wouldn’t consider investing in at any price.

Investing in Quantum Computing

Many investors who come sniffing around for ways to invest in quantum computing assume there’s a winner-takes-all scenario at the end of the rainbow. There are several things quantum computing investors need to consider:

  • A number of claims have been made about quantum supremacy which have been debated by the industry. If even the experts can’t decide when a quantum computing company succeeds, then the only real indicator – at least for pure-play stocks – would be revenue growth.
  • If any of the major tech players working on quantum computing – Google, Amazon, IBM, etc. – achieve quantum supremacy, investors may have no insights into how these major milestones are affecting revenues.
  • There are dozens of quantum computing startups out there to consider which are off limits to retail investors, Quantinuum being one of the more notable names.

The two pure-play quantum stocks right now – IonQ and Rigetti – don’t have meaningful revenues that demonstrate sufficient traction. Regardless of which companies, if any, achieve quantum supremacy, it all comes down to building something customers are willing to pay for beyond just kicking the tires. We wouldn’t buy any quantum computing stock, at any price, unless they manage to clear $10 million in non-related party revenues per year.

Conclusion

Quantum computing isn’t an easy thesis for retail investors to access with just two publicly traded quantum computing stocks on offer – IonQ and Rigetti. As for the former, they just announced revenue growth from related party transactions, something we warned subscribers about. Then there’s D-Wave, a company that hasn’t completed their SPAC yet, and which doesn’t appear very promising even if they do. The next time we look at a quantum computing stock will be if there’s a new entrant, or if any of these three quantum computing OGs manage to hit that magical $10 million per year revenue watermark.

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