Major technological breakthroughs can, over time, create trillions in shareholder value. The late 2022 release of OpenAI's ChatGPT is a great example of this phenomenon, as it set off a massive wave of interest in (and investment in) generative artificial intelligence (AI). Ambitious and forward-thinking investors will be keen to bet on technologies that have the potential to be the "next big thing" before they are discovered by the mainstream.
Quantum computing looks like one such possible opportunity, and Rigetti Computing (RGTI +1.21%) might be a good way to gain exposure to it. Shares of the mid-cap tech company are up by around 400% over the last 12 months. But with quantum computing's ChatGPT moment years or even decades away, is it too early to invest? Let's consider what the next five years could bring for Rigetti.
NASDAQ: RGTI
Key Data Points
Are we on the cusp of a quantum revolution?
Quantum computing involves creating machines that process data in an entirely different way than traditional computers. Without going into the esoteric details of how they work, these machines can rapidly solve certain unusual categories of problems that would take years -- or even centuries -- for even a powerful classical computer. The technology could theoretically have significant use cases in fields such as materials science or drug discovery because it can dramatically speed up the processing of massive volumes of data, solve previously intractable math problems, and simulate extremely complex real-world processes.
According to Boston Consulting Group, quantum computing could create up to $850 billion in economic value annually by 2040. While early movers like Rigetti could benefit from that, there is much debate about when exactly this tech will be ready for prime time, and when companies will develop ways to meaningfully apply it to actual use cases.
According to Nvidia CEO Jensen Huang, it could be another 20 years before quantum computers have any practical use. That's so much time that many of the small early movers in the niche will run out of capital and possibly cease to exist before they can develop viable business models. That said, staking out a position in quantum computing is a strategic priority for countries around the world, so some of these businesses may receive a level of government support.
Rigetti has a unique niche in the industry
Rigetti has established itself on the hardware side of quantum computing, which is similar to the role Nvidia plays in the generative AI industry. In addition to designing and building quantum computers and processors, it has developed a platform called Quantum Cloud Services (QCS), which is designed to offer quantum computing power remotely through the cloud.
Rigetti's QCS could save clients the cost and complexity of building and operating quantum computers in-house. It also allows them to access the tech's exponentially greater processing power via their traditional hardware. But while this all sounds super promising, Rigetti's current financial situation leaves much to be desired.
Image source: Getty Images.
Its revenue fell 23% year over year to just $2.4 million in the third quarter, while operating losses stood at $17.3 million -- seven times more than sales. To say Rigetti has no clear pathway to profitability seems like an understatement. The company is burning through cash at an alarming rate, and without consistent top-line growth, it's hard to see how it could change that trend. (It's scheduled to release its Q4 results on March 5.)
Research and development accounted for 69% ($12.8 million) of Rigetti's $18.6 million in operating expenses. This dynamic puts Rigetti's management in an awkward situation because it can't cut this spending without risking falling behind well-capitalized rivals like Alphabet and Nvidia, which are also investing in quantum computing.
Where will Rigetti stock be in five years?
Quantum computing, like generative AI, has the potential to be revolutionary, and perhaps create boatloads of shareholder value. However, investors should be careful not to jump the gun. Over the next five years, expect Rigetti Computing to burn through hundreds of millions of dollars, and do not expect to see it pivot toward profitability. It will likely rely on equity dilution to fund its operations -- a strategy that is often bad for a company's stock price.
