The quantum computing industry is in its early growth days. It'll likely be many years before quantum computers are common. While many tech experts believe there is a lot of potential for them to improve efficiency and productivity, the big question always leads back to when that will actually happen. And that's the biggest unknown at this stage.
That also means that for the foreseeable future, companies such as Rigetti Computing (RGTI +0.00%) are likely to incur losses. With limited revenue and significant costs, including research and development, investors should brace for the likelihood of not only continued losses, but stock offerings as well, as these companies need money to fund their future growth.
Rather than focusing on the $201 million loss that Rigetti posted last quarter, there's one figure that may be more important for investors to consider before investing in the company.
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The entire industry might be worth just over $4 billion by the end of the decade
Valuing a stock like Rigetti is difficult because it's in such early stages of its growth. Relying on revenue or earnings multiples is of no help to investors who know that it's going to be a long journey ahead. If Rigetti proves to be a big player in a huge industry, then the stock could easily be a 10x investment. The problem is that it's by no means a certainty.
However, one number that investors shouldn't overlook is $4.2 billion. That's what analysts at Grand View Research project the entire global quantum computing industry will be worth by 2030. While that's a sizable increase from the $1.4 billion they estimate it was worth last year, that's still far less than Rigetti's market cap of $8.4 billion. The company is worth close to double what analysts believe the entire industry will be worth in five years.
These are estimates only, but they help put into perspective just how outlandish Rigetti's valuation has become in relation to the size of the industry. While the temptation may be to say that its valuation might make sense when looking at the longer run (i.e., 10 or 20 years), there is no way of knowing whether Rigetti will even be around that long.
Dilution is a big risk for investors
When a company continues to burn through cash and incur losses, it's inevitable that it'll need to raise money to keep the lights on and to reinvest in its growth. This year, Rigetti is on track to burn through more than $50 million from its day-to-day operating activities, which will be the fourth consecutive year it has done so. Unsurprisingly, its share count has risen significantly in recent years, and that trend is likely to continue in the years ahead.
Data by YCharts
This can be a troubling trend for investors because as the company issues more shares, that dilutes existing shareholders, adds to the supply, which then also puts downward pressure on the share price. If there isn't a corresponding increase in buyers, then it can make the stock decline significantly in value.
Although Rigetti is a hot buy right now, it wasn't all that long ago that it wasn't. Back in 2022, when the markets were bearish on risky growth stocks, Rigetti lost a whopping 93% of its value. While that may not happen again, that volatility and uncertainty is a risk that investors should consider with this highly speculative stock.
NASDAQ: RGTI
Key Data Points
Even if you're bullish on quantum computing, you'll want to tread carefully with Rigetti
How quantum computing plays out is still a big unknown. Whether it'll be years or decades before quantum computers are used regularly is anyone's guess. The bigger issue is that it's also next to impossible to predict winners today.
That's why it may be a good idea to take a wait-and-see approach with this area of tech. However, if you do crave some exposure, then you may be better off holding a basket of similar stocks through an exchange-traded fund, to at least ensure you aren't too dependent on how a single company does, whether it's Rigetti or any other quantum computing stock.
