Billionaire Ken Griffin runs the very successful hedge fund Citadel Advisors. It not only outperformed the S&P 500 (^GSPC +0.01%) by 7 percentage points during the last three years, but also ranks as the most profitable hedge fund based on net gains since inception, according to LCH Investments.
Griffin and his team made hundreds of trades in the third quarter, but the decision to buy two popular quantum computing stocks stands out. Here are the details:
- Citadel added 51,700 shares of Rigetti Computing (RGTI 2.11%), a stock that has gained 3,750% since January 2023.
- Citadel added 122,600 shares of D-Wave Quantum (QBTS 1.59%), a stock that has gained 1,770% since January 2024.
Importantly, Citadel has microscopic stakes in both stocks, but the trades are still interesting because every Wall Street analyst that follows Rigetti and D-Wave expects the stocks to increase in the next year.
Image source: Getty Images.
Rigetti Computing: The median target price implies 42% upside
Among the seven Wall Street analysts that follow Rigetti Computing, the median target price is $40 per share, which implies 42% upside from its current share price of $28. The highest target of $51 implies 82% upside, and even the lowest target of $35 implies 25% upside as of Dec. 6.
Rigetti specializes in superconducting quantum computing, a modality where microscopic superconducting circuits are cooled to temperatures near absolute zero to create qubits, the fundamental unit of quantum information. Qubits are like bits (binary digits) in classical computers, but they encode more information and have unique qualities that let quantum computers solve certain problems more efficiently.
Rigetti benefits from vertical integration, meaning it realizes cost efficiencies by exercising tight control over its supply chain. It manufactures quantum processors, and develops the hardware and software infrastructure needed to provide cloud-based quantum services. The company also designed the first multi-chip quantum processor, which may afford it an edge in scaling fault-tolerant systems.
However, while quantum stocks are popular on Wall Street, many experts believe useful quantum computers -- fault-tolerant systems that solve commercially relevant problems -- are still one or two decades away. Indeed, the quantum computing market will still be 450 times smaller than the artificial intelligence market in 2030, according to Grand View Research.
The biggest problem with Rigetti is valuation. Its price-to-sales (P/S) ratio of 1,080 is about 10 times higher than the most expensive stock in the S&P 500, which is Palantir. That is unsustainable. I feel confident in predicting that Rigetti shares will decline 80% to 90% at some point in the future.
NASDAQ: RGTI
Key Data Points
D-Wave Quantum: The median target price implies 48% upside
Among the 11 Wall Street analysts that follow D-Wave Quantum, the median target price is $40 per share, which implies 48% upside from its current share price of $27. The highest target of $48 implies 77% upside, and even the lowest target of $35 implies 30% upside as of Dec. 6.
D-Wave takes a different approach to quantum computing compared to Rigetti. While the company still uses superconducting circuits to create qubits, it primarily builds quantum annealers as opposed to gate-based systems. Annealers are a niche technology. They cannot run the majority of quantum algorithms, but they excel at solving optimization problems.
Importantly, gate-based architectures will have more practical applications in the long run, but they are less tolerant of noise and less scalable today. For instance, D-Wave currently builds annealing systems with more than 4,000 physical qubits. But Rigetti's roadmap does not even contemplate 1,000-qubit systems until 2027. The upshot is that D-Wave systems have more utility today, although that utility is still very limited.
In the third quarter, D-Wave's revenue increased 100% to $3.7 million, but its non-GAAP net loss totaled $18.1 million. However, the company has plenty of cash on its balance sheet because it has compensated for losses by diluting stockholders. Its outstanding share count has increased 31% this year and 117% over the past two years.
Nevertheless, the most concerning problem is valuation. D-Wave trades at 325 times sales. That may seem cheap compared to Rigetti, but both stocks are unreasonably expensive, particularly when the quantum computing market is projected to grow at just 21% per year through the end of the decade.
D-Wave may be worth much more in the distant future, but I would be shocked if the stock doesn't drop 80% to 90% at some point between now and then. Investors should wait for a much more reasonable entry point or at least keep any positions very small.
