Rigetti Computing Stock: A Risky Bet on Quantum Computing

The value of something is simply what others are willing to pay for it. Value stocks represent cash-generating assets that grow slowly over time, while growth stocks promise rapid growth into the future. Lately, the value of future growth has been falling. With interest rates rising, the value of a dollar today is becoming more valuable than a dollar promised tomorrow. When it comes to growth stocks, we can categorize them as follows:

The second bullet point represents companies we dont consider investable. In that category we would place the latest quantum computing company to go public, Rigetti Computing (RGTI), which is now publicly traded following their successful merger with a special purpose acquisition company (SPAC) called Supernova Partners Acquisition Company II.

The last time we looked at Rigetti was in a piece titled Rigetti Computing Stock: A Pure-Play on Quantum Computing in which we noted 2021 revenues coming in at $5.54 million. Its a start, but theyll need to clear $10 million per annum before we would consider revenues meaningful, and were told thats expected to happen this year with 2022 revenues estimated at $18 million. But theyre not off to a good start with Q1-2022 revenues of just $2.1 million, down from $2.36 million in the year prior. The company attributed the drop in revenues to contract timing, something that will continue to result in lumpy quarterly revenues as they expect to continue generating the majority of revenues from development contracts over at least the next several years.

To make revenues even more unpredictable, theres customer concentration risk 83% of Q1-2022 revenues came from three customers (Q1-2021 saw 81% of revenues from two customers).

Like Palantir, Rigetti derives a significant amount of revenue from contracts with U.S.and foreign governments and government agencies. Around 60% of 2021 revenues were from governments with the number reaching 76% in Q1-2022.

The SPAC Rigetti merged with charged a healthy 14.44% in fees, leaving the company with $225.6 million in proceeds, a disappointing number because they were expecting over twice that amount. As of Q1-2022, Rigetti was holding around $206 million cash with debt of $32 million. If theyre burning about $10 million per quarter, then their runway is a healthy five years. And with their timelines slipping, theyll need all the runway they can get.

The companys pessimism around achieving quantum greatness is pervasive throughout the latest 10-Q. Because of inflation, labor shortages, supply conditions, and what they perceived as a lackluster SPAC offering, the companys milestones have slipped. Rigetti now plans to introduce a 1,000+ qubit system in late 2025 and 4,000+ qubit system in or after 2027. We dont know how that impacts the glossy SPAC deck projections of $288 million in revenues by 2025, and the accompanying profitability, but you can be sure theyll be burning through lots of R&D cash to bring these systems to market.

And if history repeats itself, then dont hold your breath. From the horses mouth:

We have in the past failed to meet publicly announced milestones and may fail to meet projected technological milestones in the future. For example, in 2018, we announced that we planned to build and deploy a128-qubitsystem over the subsequent twelve months, but have not to date built a128-qubitsystem.

At least they admit their inability to execute. This weak vote of confidence from management, coupled with revenue concentration risk, a heavy reliance on government contracts, and a lack of meaningful revenues, means this is a quantum computing stock we wouldnt consider investing in at any price.

Many investors who come sniffing around for ways to invest in quantum computing assume theres a winner-takes-all scenario at the end of the rainbow. There are several things quantum computing investors need to consider:

The two pure-play quantum stocks right now IonQ and Rigetti dont have meaningful revenues that demonstrate sufficient traction. Regardless of which companies, if any, achieve quantum supremacy, it all comes down to building something customers are willing to pay for beyond just kicking the tires. We wouldnt buy any quantum computing stock, at any price, unless they manage to clear $10 million in non-related party revenues per year.

Quantum computing isnt an easy thesis for retail investors to access with just two publicly traded quantum computing stocks on offer IonQ and Rigetti. As for the former, they just announced revenue growth from related party transactions, something we warned subscribers about. Then theres D-Wave, a company that hasnt completed their SPAC yet, and which doesnt appear very promising even if they do. The next time we look at a quantum computing stock will be if theres a new entrant, or if any of these three quantum computing OGs manage to hit that magical $10 million per year revenue watermark.

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Rigetti Computing Stock: A Risky Bet on Quantum Computing