Editor's note: This article has been corrected: Craig Ellis is with B. Riley Securities.
Quantum computing has arguably been one of the hottest subsectors of the market over the past year, with a few of these stocks generating jaw-dropping returns. But there's still wide debate among investors over quantum computing's true potential and whether the technology can be commercialized to the masses. One quantum company that has taken the market by storm is Rigetti Computing (RGTI 1.18%), which has seen its stock explode over 3,700% in just the past year.
Billionaire investors on Wall Street seem to be taking notice. In the second quarter, some of the world's top hedge funds began piling into Rigetti, a potentially bullish signal.
Quantum is getting more support
Quantum computers may be the next big thing in the history of computers, harnessing the power of quantum qubits. The qubits can have values between the black-and-white zeroes and ones seen in digital systems, making them better suited to solving a certain type of complex pattern-finding problems. That may sound too narrow to be useful, but these specific tasks are crucial in fields such as medical research, financial modeling, and cryptography.
Image source: Getty Images.
Some researchers believe that once the potential of quantum computers is realized, they will be more powerful than the best supercomputers today (for a certain set of specialized tasks) and will be able to solve some of society's biggest problems, including those in finance.
Rigetti is an early leader in the development of quantum computers. In July, the company announced that its 36-qubit system had achieved a very high median 2-qubit gate fidelity of 99.5%. Different companies define gate fidelity in different ways, so it's hard to compare apples to apples here. Still, the 99.5% result represented half the noise of Rigetti's 2024 flagship, the Ankaa-2
Also, the more qubits a quantum system has, the more theoretically powerful it is. Management also said it was on track to release a 100-qubit system with similar accuracy by the end of 2025.
What's also been encouraging for market watchers is that the government seems more open to the idea of quantum commercialization. Recently, the Air Force Research Laboratory awarded Rigetti a $5.8 million contract to help it develop a superconducting quantum network, which would provide fast and accurate data transfer within a quantum computing system.
NASDAQ: RGTI
Key Data Points
B. Riley Securities analyst Craig Ellis recently reiterated his buy rating on Rigetti and hiked his price target to a Wall Street high of $35 per share. Ellis specifically highlighted the shifting sentiment at the Department of Energy's National Laboratories, which now appears to focus on quantum technology with clear business value.
"Former frontier technology is rapidly advancing toward integrated capability and commerciality," he said.
Billionaires and their hedge funds seem to be taking notice of this shift, highlighted by several moves in the second quarter:
- Citadel Advisers, the investment manager of Citadel's hedge fund operation, hiked its position in the second quarter by over 50% and now owns more than 1.2 million shares.
- Tudor Investment, run by Paul Tudor Jones, initiated a position and purchased over 900,000 shares in the quarter.
- Two Sigma Investments, founded by billionaires John Overdeck and David Siegel, who now serve as co-chairs of the company's board of directors, increased its position by 183%, to over 600,000 shares.
Be skeptical of the smart money
While following the smart money is a great way to find new investment ideas and double-check an investment thesis, investors should not follow these moves blindly. For one, they were made in the past, and investors often discover them in regulatory filings released months after the trades actually occurred.
Additionally, retail investors will truly never know the motive behind a hedge fund's position. Hedge funds often trade on a short-term basis, which is not a good investing approach for retail. Finally, while billionaires run these hedge funds, it's difficult to know how involved they truly are in investment decisions. I'm sure they have some role, and they likely have a big role in hiring portfolio managers, but that doesn't mean they are necessarily the ones pressing the buy button.
Rigetti's technology has immense potential. However, the stock trades at a $9.6 billion market cap, generates very little revenue, and is just starting to break even. Furthermore, large-scale commercial success may be years away, and quantum computing is an inherently expensive and difficult technology. None of the required steps forward will be easy.
If Rigetti can achieve commercialization of quantum computers and they are as powerful as some experts think they can be, the stock could be a big winner. But any hiccups could lead to sharp sell-offs. For these reasons, I would avoid the stock or invest only a small, speculative amount.
