For the last few years, artificial intelligence (AI) has emerged as a forceful megatrend fueling the stock market to new heights.
Sophisticated chipsets known as graphics processing units (GPUs) represent the foundation on which generative AI applications are being developed. While GPUs remain an integral technology across both hardware and software, a new piece of infrastructure is beginning to emerge as the second layer in the AI pyramid: quantum computing.
While quantum computing is not a widely commercialized product yet, AI companies, both large and small, are swiftly investing in its development. From "Magnificent Seven" members such as Nvidia, Microsoft, Alphabet, and Amazon to lesser-known businesses like IonQ and D-Wave Quantum, there is no shortage of companies looking to get involved in this disruptive technology.
One quantum computing stock that has managed to fetch a lot of attention over the last year is Rigetti Computing (RGTI 3.44%). With shares trading for below $15, is now a lucrative opportunity to start buying? Read on to find out.
NASDAQ: RGTI
Key Data Points
Quantum computing is a promising opportunity, and...
Given the small scale of quantum computing right now, industry estimates over its total addressable market (TAM) vary considerably. What is more widely accepted is that the power of these computers could bring a new wave of efficiency and discovery in industries such as cybersecurity, financial services, and pharmaceuticals.
According to a study from Statista, quantum computing could create up to $850 billion in economic value creation over the coming decades. Management consulting firm McKinsey & Company is even more bullish, calling for $1.3 trillion in added value by the next decade thanks to quantum computing.
... Rigetti Computing has gotten a lot of attention, but...
The chart below illustrates' Rigetti Computing's share price dynamics over the last year. Throughout most of 2024, shares of Rigetti were hovering around penny stock levels.
However, toward the end of the year, Rigetti stock started going parabolic. In my eyes, this rapid ascent can be tied to a number of different factors.
First, back in December, AI leader Alphabet teased investors with a little preview of its own quantum computing chip, Willow. In addition, both the S&P 500 and Nasdaq Composite indexes experienced notable increases during the last three months of 2024.
To me, shares of Rigetti initially became caught up in more of a bullish macro sentiment around the quantum computing opportunity and broader market trends in general.
But notice how shares took a nosedive back in January, following several weeks of sharp gains. Rigetti's sell-off earlier this year came after Nvidia CEO Jensen Huang made comments alluding to quantum computing's usefulness being several years away.
While Rigetti stock has since rebounded from low points earlier this year, the stock has mostly traded sideways over the last several months.
Image source: Getty Images.
... smart investors need to understand the full valuation picture
When it comes to valuing a stock, smart investors understand that there is much more to look at than the share price. While a $13 stock price might look cheap, consider that Rigetti Computing boasts a market capitalization of $4.2 billion. Given the company has only generated about $9 million in sales over the last 12 months, that implies Rigetti stock is trading at a price-to-sales (P/S) multiple north of 320.
RGTI PS Ratio data by YCharts
To put this into context, Rigetti's P/S multiple is in a completely separate universe compared to the AI industry's biggest developers.
Even though the appearance of a low share price might imply the company is trading for a discount, the valuation trends explored above suggest otherwise.
Not only is Rigetti stock overbought, but the valuation expansion pictured above is unsustainable. I would pass on Rigetti Computing stock right now. I see the company as a highly speculative opportunity in an emerging field that is still developing.
