Quantum computing is all the rage on Wall Street. In the past year, Rigetti Computing (RGTI +4.04%) shares have advanced 2,570% and D-Wave Quantum (QBTS +2.35%) shares have advanced 2,840%. But certain Wall Street analysts think the stocks are wildly overvalued after those monster runs.
- Troy Jensen at Cantor Fitzgerald has set Rigetti with a target price of $18 per share. That implies 54% downside from its current share price of $39. Quinn Bolton at Needham has the same forecast.
- Kingsley Crane at Canaccord has set D-Wave Quantum with a target price of $20 per share. That implies 41% downside from its current share price of $34. Quinn Bolton at Needham has the same forecast.
Here's what investors should know about these quantum computing companies.
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Rigetti Computing: 54% implied downside
Rigetti specializes in superconducting quantum computing, a modality that uses electrical circuits at temperatures near absolute zero to create qubits, the fundamental unit of information in quantum computers. The company benefits from vertical integration, as manufactures the processors, designs the software, and provides cloud-based quantum computing services.
Particularly important, Rigetti develops gate-based systems that experts say have less commercial value in the immediate future compared to the annealing systems pioneered by D-Wave. However, as quantum computing matures in the coming years and challenges surrounding error correction and scalability are resolved, gate-based systems will ultimately be able to tackle more types of problems.
Rigetti reported second-quarter financial results that missed expectations on the top and bottom lines. Sales fell 42% to $1.8 million and the GAAP net loss tripled to $40 million. Year to date, operations have consumed $30 million in cash, but the company has $425 million in cash and short-term investments on its balance sheet after issuing more stock in June.
For investors, there are two problems with Rigetti. First, gate-based quantum computers will not have practical use cases for most enterprises for at least five years, probably longer, so the market is very young. Moreover, Rigetti trades at 1,253 times sales, which means investors are paying $1,253 for every dollar the company earns in revenue. At that price, shares could easily decline 54% under the right conditions.
NASDAQ: RGTI
Key Data Points
D-Wave Quantum: 41% implied downside
D-Wave specializes in superconducting quantum computing. It recently moved into gate-based systems, but has historically focused on annealing systems, which excel at solving optimization problems in disciplines like finance, logistics, scheduling, and supply chain management. For instance, Volkswagen has used D-Wave's technology to optimize taxi routes through the congested city streets of Beijing.
D-Wave is not as vertically integrated as Rigetti because it does not manufacture its own processors, but it has another advantage. Gate-based systems are currently difficult to scale due to high error rates, which limits commercial utility, but annealing systems are more tolerant. So, D-Wave commercialized quantum computers and cloud quantum computing services before its competition.
D-Wave reported mixed second-quarter financial results, beating estimates on the top line but missing on the bottom line. Revenue increased 42% to $3.1 billion and the non-GAAP net loss narrowed to $0.08 per diluted share. Year to date, operations have consumed $35 million in cash, but the company has $819 million in cash on its balance sheet after issuing stock in July.
D-Wave's quantum annealing systems have more commercial utility today than Rigetti's gate-based systems, but the stock still trades at a very expensive 384 times sales. That may sound cheap after learning Rigetti trades at 1,253 times sales, but 384 times sales is still twice as expensive as the most richly valued stock in the S&P 500. For that reason, a 41% decline is entirely plausible.
