The fear of missing out is a powerful force in financial markets. It's hard to see a stock soaring parabolically and not want a piece of the action. That said, chasing after speculative stocks can lead to significant losses because they often lack fundamental support to justify the gains. Rigetti Computing (RGTI 3.55%) is an excellent example of this concept.
Shares have collapsed by an eye-popping 42% over the last 30 days as investors take profits and lose interest in its hype-driven rally. That said, while Rigetti stock is underperforming right now, that doesn't mean it will always be a loser. Let's explore what the next five years may hold for the company and the quantum computing industry as a whole.
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Why did Rigetti's stock boom?
A rising tide lifts all boats. And Rigetti's legendary rally started in late 2024 when cloud computing leader Google released Willow, a state-of-the-art quantum computing chip capable of correcting its own mistakes. Many investors believe this may pave the way for commercially viable quantum computers, and capital quickly flowed into the industry. Over the following months, quantum computing start-ups (including Rigetti) started to report early hardware sales, leading to a speculative frenzy.
NASDAQ: RGTI
Key Data Points
On the surface, this may look like quantum computing's ChatGPT moment. And if the industry were to take off, Rigetti Computing would play a picks-and-shovels role similar to Nvidia -- supplying the quantum chips, processors, and hardware other companies need to serve their enterprise clients. But the situation is actually very different.
While generative AI (artificial intelligence) can justify itself with viable and popular consumer-facing products (such as ChatGPT and Gemini), quantum computing is still in a very nascent stage. In the third quarter, Rigetti reported just $1.95 million in sales. That's down 18% year over year. And it suggests that the company's clients are probably buying its hardware for testing and experimentation instead of large-scale commercial use cases.
The company also has no clear pathway to profitability. It posted a third-quarter operating loss of $20.5 million, with most business outflows going to the research and development needed to improve its technology.
When will quantum computing be ready for prime time?
When will quantum computing shift from a speculative money pit to a transformative technology that could revolutionize everything -- from materials science to drug discovery? That's the million-dollar question. A 2023 report from McKinsey & Company suggests that could happen around 2040. Google and IBM are more optimistic, expecting to have commercially viable quantum computers within five years.
However, even when these devices become technically capable of solving useful and commercially relevant problems, it may take many more years for that to become the foundation of a sustainable business model due to issues such as cost, reliability, and even government regulation.
Even in the best-case scenario, an early mover like Rigetti Computing could face years, if not decades, of losses before investors even begin to see a hint of profits. While the company has approximately $450 million in cash and short-term investments on its balance sheet, an impressive amount. However, even this might not be enough to cross the finish line, and management may have to turn to other sources of capital, such as equity dilution, to raise the money necessary to maintain operations.
For unprofitable companies, creating and selling more units of stock is a much safer alternative to taking on debt. However, it can hurt long-term investors by reducing their claim on the company's future earnings.
Is Rigetti stock a long-term buy?
Rigetti's massive cash pile will likely have a stabilizing effect on the stock's performance and prevent it from falling too far over the next few years. Despite the weak performance, the company is in no immediate risk of bankruptcy or becoming unable to fund its research. That said, until quantum computing demonstrates real signs of viability, Rigetti shares appear too speculative for investors who want to sleep easily at night.
