Alphabet subsidiary Google recently announced two major technical achievements with its Willow quantum computing chip. In response to the news, shares of Rigetti Computing (RGTI 1.91%) and D-Wave Quantum (QBTS 2.37%) during the next three weeks advanced 280% and 110%, respectively. But the market may have gotten ahead of itself... way ahead of itself.
Most Wall Street analysts expect both stocks to decline sharply in the coming months, as detailed below:
- Among the six analysts that follow Rigetti Computing, the median 12-month target price is $3.25 per share. That forecast implies 77% downside from the current share price of $13.90.
- Among the six analysts that follow D-Wave Quantum, the median 12-month target price is $3 per share. That forecast implies 52% downside from the current share price of $6.25.
Here's what investors should know about Rigetti and D-Wave.
Image source: Getty Images.
Quantum computing is a decade or two from widespread adoption
The term artificial intelligence (AI) was first used in the mid-1950s by mathematics professor John McCarthy at Dartmouth College. Researchers made breakthroughs at a steady pace in the subsequent decades, but only recently -- after ChatGPT demonstrated the practical value in generative AI -- have most buisnesses taken notice.
I mention that because a litany of smart people -- including Cisco CEO John Chambers, Meta Platforms CEO Mark Zuckerberg, and Nvidia CEO Jensen Huang -- recently shared similar opinions on quantum computing: While the technology will be transformative, it will not have mainstream utility for one or two decades.
Google seems to share that opinion despite its Willow chip making headlines last month. The company sees itself as being on the third step of a six-step roadmap that ultimately leads to commercially useful quantum computing applications. Importantly, it took Google over 10 years to complete the first two steps, which hints at another 20 years to finish the roadmap.
Other industry observers have similar outlooks. Grand View Research estimates quantum computing will a $4 billion market in 2030. Comparatively, cloud computing is projected to be a $2.4 trillion market by the end of the decade. In other words, companies will be spending about 600 times more on cloud services versus quantum computing five years from now.
It's too early to pick winners and losers in quantum computing
Some readers may think: Nvidia stock gained 82,000% in the last 20 years, so doesn't it make sense to buy quantum stocks today? Not necessarily. The companies destined to be the biggest winners in quantum computing may not even exist yet. And even if they do, the odds of picking a winning stock decades ahead of widespread adoption are very small.
For instance, Intel was worth $140 billion two decades ago. That scale should have given the company a substantial advantage over Nvidia, which was worth $4 billion at the time. So, most reasonable investors would have picked Intel as the likely winner in a future AI boom. But the exact opposite happened.
Intel's market value has actually declined over the past two decades. The company is worth less than $100 billion today. But Nvidia has grown into a $3.6 trillion business and it has become the undisputed leader in AI chips. The same lessons apply to quantum computing today.
NASDAQ: RGTI
Key Data Points
Rigetti Computing: 75% implied downside
Rigetti builds and operates quantum computers. The company built the first multi-chip quantum processor, and it offers cloud-based quantum computing services. That full-stack approach is similar to the strategy that has made Nvidia so successful in artificial intelligence. But the similarities stop there.
Rigetti reported weak financial results in the third quarter. Revenue fell 24% to $2.4 million, and GAAP net income was a loss of $0.08 per diluted share. It also burned $42 million in cash in the first nine months of 2024, and has only $20 million in cash on its balance sheet. That is a bad combination, especially when interest payments on debt are already consuming a quarter of revenue.
However, there is an even more concerning problem with Rigetti. Shares currently trade at 180 times sales. That would be an expensive price-to-earnings (P/E) multiple, but it is incomprehensible as a price-to-sales (P/S) multiple. Comparatively, the average S&P 500 company has a P/S ratio around 3. Prospective investors should avoid Rigetti, and current shareholders should consider selling.
NYSE: QBTS
Key Data Points
D-Wave Quantum: 52% implied downside
D-Wave offers a full-stack quantum computing solution that spans hardware, software, and services. It was the first company to introduce quantum computing systems commercially, and management says its clients "have included" major brands like Mastercard and Volkswagen.
D-Wave reported weak financial results in the third quarter. Revenue dropped 27% to $1.8 million, and GAAP net income was a loss of $0.11 per diluted share. The company burned $45 million in cash through the first nine months of 2024, and it has only $29 million in cash on its balance sheet. Additionally, interest payments on debt consumed more than half of revenue in the recent quarter.
Like many popular quantum computing companies, D-Wave has a serious valuation problem. The stock currently trades at 115 times sales. That is slightly less expensive than Rigetti, but it is still an outrageous PS ratio. Prospective investors should avoid this stock, and current shareholders should think about selling.
