Certain artificial intelligence (AI) stocks -- chief among them Palantir Technologies -- currently trade at absurd valuations. But Palantir looks cheap compared to popular quantum computing stocks Rigetti Computing (RGTI 4.22%) and D-Wave Quantum (QBTS 4.31%). Their share prices have increased 3,500% and 1,700%, respectively, since January 2023.
I expect both stocks to crash next year when the quantum computing bubble inevitably bursts. Here's why.
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Practically useful quantum computers are likely (at least) a decade away
Qubits, the fundamental unit of information in a quantum computer, can exist in states of superposition and entanglement. That means they can exist in multiple states at the same time and the state of multiple qubits can be inextricably linked. Those phenomena allow quantum computers to solve complex problems beyond the scope of classical computers.
However, no company has yet constructed a large-scale, fault-tolerant quantum computer, meaning a system that corrects errors in real time and possesses enough qubits (experts estimate between 10,000 and 1 million are needed) to perform useful quantum computations. Qubits easily lose their fragile quantum states when exposed to environmental noise, which leads to high error rates.
Numerous experts believe large-scale, fault-tolerant systems are at least a decade away. Indeed, Grand View Research estimates the quantum computing market will grow at just 21% annually to hit $4 billion by 2030. But artificial intelligence (AI) spending is forecast to grow at 36% annually to reach $1.8 trillion over the same period.
Here's the big picture: Quantum systems excel at simulation and optimization problems, which means they could revolutionize fields like materials science, finance, and logistics. But practically useful quantum computers are probably a decade (or more) away. Indeed, the AI market is projected to be 450 times bigger than the quantum computing market in 2030.
NASDAQ: RGTI
Key Data Points
1. Rigetti Computing
Rigetti specializes in superconducting quantum computing, a modality where microscopic superconducting circuits are cooled to near absolute zero to create qubits. The company has a cost advantage in vertical integration; it maintains tight control over its supply chain by manufacturing quantum processors, developing quantum hardware and software, and delivering cloud-based quantum services.
Importantly, Rigetti was the first company to develop multichip quantum processors, which link several small chiplets to form large processors. The company believes its multichip architecture will help it scale quantum computing systems by limiting qubit crosstalk, reducing errors. Yet, Rigetti's product roadmap does not show 1,000-qubit systems until late 2027, and even then its computers will be years away from mainstream utility.
Rigetti stock trades at an outrageously rich valuation of 1,025 times sales. For context, Palantir is the most expensive stock in the S&P 500 at 120 times sales. Rigetti is literally 10 times more expensive. The current multiple is unsustainable. In fact, the valuation would be unsustainable even if Rigetti shares fell 90%. With practically useful quantum computers at least a decade away, this stock is due for a major correction.
2. D-Wave Quantum
D-Wave uses superconducting circuits to create qubits, but its product strategy differs from the one Rigetti employs. D-Wave is primarily focused on quantum annealers rather than gate-based systems. Annealers cannot run most quantum algorithms, which limits their utility, but they excel at solving optimization problems.
Gate-based computers will ultimately address more use cases, but quantum annealers are currently easier to scale because they tolerate more noise. That important distinction let D-Wave commercialize quantum computers before its peers. Also, while competitors struggle to build gate-based systems with a few hundred physical qubits, D-Wave has already built annealers with nearly 5,000 physical qubits.
As the first mover, D-Wave has already forged deep relationships with certain clients. That may give the company an edge is driving adoption of its products and services as quantum computing technology matures. However, it does not justify the valuation. The stock trades at 325 times sales. While much cheaper than Rigetti, that multiple is still nonsensical when quantum computing sales are forecast to increase at just 21% annually through 2030.
