Rigetti

Quantum computing pure-play stocks have been on an unbelievable run over the past few weeks. One year ago, Rigetti Computing (RGTI -3.01%) was essentially a penny stock, trading for less than $1 per share. Now, it’s worth nearly $50 per share. A huge chunk of that growth has come recently, as Rigetti Computing traded for about $15 at the start of September.

There have been numerous headlines that have driven Rigetti Computing’s stock higher over the past few weeks, and after these unbelievable returns, some may be wondering if it’s time to take some profits and move on. However, should Rigetti Computing continue going higher, investors will miss out on some lucrative returns.

So, which course of action is the best?

Image source: Getty Images.

Rigetti Computing has soared on a few pieces of news recently

Rigetti Computing is a quantum computing pure play and has no backup business. For Rigetti, it’s quantum computing supremacy or bust. This is no easy feat, as the quantum computing space is filled with other strong competition like Alphabet and International Business Machines (IBM). Both have nearly unlimited resources compared to Rigetti, which makes this uphill climb even more challenging.

However, there are signs that Rigetti will be just fine. Just recently, it announced that it has sold quantum computing systems to two customers for about $5.7 million. One was to an Asian manufacturing company, while the other was a California physics and AI start-up. This shows Rigetti Computing already has a competitive offering for clients, as these two likely shopped around for other options before settling on Rigetti’s Novera quantum computer.

Another headline that caused Rigetti’s stock to pop was JPMorgan‘s announcement that it was investing up to $10 billion in four areas, one of which is quantum computing. This caused shares across the sector to pop, which has me worried that the quantum computing sector may be getting too hot.

In addition to quantum computing, JPMorgan was also planning on investing in supply chains and advanced manufacturing, defense and aerospace, and energy. There are a lot of mouths to feed in those investment sectors, and it’s not like JPMorgan is going to dump all $10 billion into quantum computing stocks. Furthermore, there was no specific announcement that JPMorgan would invest in Rigetti Computing; it was just that it was interested in investing in the sector.

After the pop, Rigetti is a $15 billion company, so even if it received a $1 billion investment from JPMorgan (which is extremely unlikely for JPMorgan to spend 10% of its funds on one company), it would only amount to a small stake in the business.

I think this displays how overheated the quantum computing investment market is getting, as we’re still a ways away from quantum computing being adopted at a widespread scale.

Rigetti Computing thinks we’re still years away from a large quantum computing market

Most quantum computing competitors point toward 2030 as the year when quantum computing will start to become a viable technology. Before 2030, Rigetti estimates that the annual value for quantum computing providers is about $1 billion to $2 billion, mostly fueled by government labs and other research institutions. From 2030 to 2040, the market heats up quite a bit, with Rigetti Computing estimating $15 billion to $30 billion.

If we estimate that the market will reach $30 billion in annual value by 2035, Rigetti captures a 90% market share (similar to what Nvidia has done in the AI world), and it can deliver a 50% profit margin (what Nvidia has accomplished), that would give Rigetti $6.75 billion in annual profits. If we apply a 40 times earnings multiple on that, it would indicate Rigetti would be valued as a $270 billion company. That’s more than a 10-bagger from today’s levels, so if Rigetti wins the quantum computing arms race and takes significant market share, there is still plenty of upside left in the stock.

However, there’s likely to be a large market drawdown sometime between now and 2035, and I’ll likely stay patient with investing in quantum computing stocks until then. I wouldn’t be surprised to see this upward trend continue for the stocks, but that means a bubble could be forming. I don’t think it’s a bad idea to trim some of your quantum computing stocks to take a quick win, as it is a good combination of letting your winners run while also being prudent about the rapid rise of these stocks that are still years away from profitability and viability.

With shares up by a jaw-dropping 5,100% over the last 12 months, Rigetti Computing (RGTI -3.01%) exemplifies the life-changing potential of stock investing. If you bought $10,000 worth of shares of this speculative tech company last October, your position would now be worth over half a million dollars.

After a rise of that magnitude, potential new investors must be left wondering if they should jump on Rigetti’s hype train or wait for a dip. Let’s dig into the company’s fundamentals to decide what the near future might bring.

Is quantum computing ready for prime time?

Quantum computing promises to radically expand the reach of digital technology. When it works accurately, it can solve certain types of unusual, but extraordinarily difficult, problems that would take even a classical supercomputer an impossible amount of time. And while the technology has seemed “just around the corner” for decades, some recent breakthroughs have ignited optimism.

For example, one of the chief challenges in developing a useful quantum computer is that they are vastly more prone to errors than classical machines. But late last year, Alphabet subsidiary Google revealed its Willow chip, a state-of-the-art quantum computing chip that does a progressively better job of correcting its own mistakes the more computing power it uses. Perhaps more remarkably, on one of the benchmark computational problems that is used to test the abilities of quantum machines, Willow delivered the answer in about five minutes. For a traditional supercomputer to solve it would have taken 10 septillion years.

If they can be made reliable and cost effective enough to commercialize, such machines could drive revolutionary advances in areas ranging from drug discovery to material science. Quantum computers could also play a role in artificial intelligence by assisting with model training and optimization, which involves finding the most efficient use of resources to achieve a task.

Where does Rigetti fit in?

While Google looks like the leader in quantum computing technology, a rising tide lifts all boats, and investors are pouring capital into the entire industry. Rigetti’s compelling business model has also likely played a role in its explosive rally.

Rigetti takes a comprehensive picks-and-shovels approach to the quantum computing industry. It designs and builds its own chips, called quantum processing units (QPUs), at its California-based foundry. And it created its own programming language called Quil alongside a platform called Quantum Cloud Services (QCS), which is designed to allow clients to access its quantum processing power through the cloud.

The company is in the early stages of commercialization: It recently announced a $5.7 million purchase order for two of its Novera quantum computing systems, which it expects to deliver in 2026. But while these deals are a good sign, investors shouldn’t expect those purchases to necessarily mark the start of mass quantum computing adoption or sustainable growth.

While nonprofit research institutions and early adopters will continue to experiment with quantum computing, analysts at McKinsey and Company believe scalable quantum devices might not be commercially viable before 2040 at the earliest. In the meantime, Rigetti’s financial condition is alarming.

Massive cash burn

Image source: Getty Images.

For better or worse, public companies exist to generate profits for their shareholders. Technological prowess comes second, and arguably doesn’t matter at all if it doesn’t eventually benefit the bottom line. Rigetti’s shareholders may soon have to reckon with this fact.

In the second quarter, its operating losses grew 24% year over year to $19.8 million (compared to revenue of $1.8 million). Meanwhile, the number of shares outstanding jumped by 74% to almost 300 million. Rigetti is still sitting on a mountain of cash from a $350 million stock offering in June. But that money won’t last forever, and investors should expect the company to continue relying on equity financing to fund operations until it can achieve profitability.

With viable quantum computers potentially over a decade away, Rigetti’s management team will likely need to substantially dilute the positions of current shareholders in their efforts to get the company across the finish line. Yet even with this in mind, it’s not too late to buy the stock. If anything, it’s too early. But it may make sense to wait for a correction or another technological breakthrough before you consider opening a position in the stock.