After Rigetti Computing (RGTI +0.24%) rode a wave of enthusiasm that saw the quantum computing stock reach above $58, shares have tumbled to around $16 as investors question whether the company's sky-high valuation is justified.
Some recent stumbles have accelerated the stock's decline, like the delay of Rigetti's most ambitious quantum computer to date, Cepheus-1-108Q, and its failure to advance in a crucial government program.
While Rigetti bulls point to partnerships with chipmaking giant Nvidia and other government agencies as signs of a bright future, headlines and potential only go so far. Rigetti needs to start turning that potential into real dollars.
NASDAQ: RGTI
Key Data Points
The Rigetti bull case
In the best case, over the next few years, Rigetti makes real breakthroughs in its technology, scales significantly, and starts landing the kind of contracts that really move the needle -- not one-off orders worth a few million dollars, but sustained commercial relationships worth tens of millions annually. By 2031, revenue reaches north of $100 million, margins improve, and the path to profitability is clear.
In that scenario, you could see the stock trading at two to three times today's levels. Rigetti has some real ingredients working in its favor, but a whole lot has to go right for this to come true -- and fast.
Rigetti and other quantum stocks have a problem
Useful quantum computing has been "five years away" for a lot longer than that. The industry has made real progress, yes, but the gap between lab breakthroughs and useful commercial products remains enormous, and that gap is everything.
Rigetti has to compete with not only better-funded peers but also the likes of Alphabet, IBM, and Microsoft. These companies have R&D budgets that exceed Rigetti's entire market cap many times over. If it takes much longer than five years, Rigetti could be in trouble.
The company's more than $450 million in cash buys years of runway -- about five at current burn rates -- but that is if nothing changes. Expenses may ramp considerably as the company attempts to stay in the race and keep up with its competition. The company will need to raise more capital, likely a lot, and that could dilute existing shareholders considerably -- as it already has.
Here's what I think the next five years hold for Rigetti
Image source: Getty Images.
The most probable five-year outcome, in my view, is that technological breakthroughs will continue, but viable commercial computing will still be "just around the corner." In that time, revenue has grown, but not nearly enough.
I don't have a crystal ball, and I'm certainly not a technical expert in the field, so I can't say for certain when -- or if -- commercially viable quantum computing will arrive. I can say, however, that there is far too much uncertainty and, frankly, hype for me to invest when the company is already valued at $5.5 billion, and its stock is trading at more than 600 times sales.
I'd rather get my quantum exposure through a company that doesn't need quantum to work in the next few years -- or ever -- to justify its stock price, like Alphabet.
