Rigetti Computing: A Buy Despite Low Revenues In An Emerging Field (NASDAQ:RGTI)

Rigetti Computing (NASDAQ:RGTI) is up 172.43% (YoY), almost breaking the $2 barrier and is now trading 42.27% below its 52-week high of $3.43 (at the time of writing). This increase comes a few months after the media reported indicated that the company had “filed a prospectus” in an attempt to raise $250 million through a mixed offering. It’s been two years since RGTI went public through a SPAC merger (after its formation in 2013) and it has been innovating different elements of quantum computing. This includes related chips and integrator software, where quantum processing units (QPUs) can be accessed in the cloud. Quantum computing is part of the four industries that, according to a McKinsey article, “may gain up to $1.3 trillion in value by 2035.”

Thesis

I think Rigetti Computing has great growth potential and quantum computing is expected to take over. helm in improving various technological sectors such as cryptography and machine learning (ML). RGTI is also working to increase the momentum of high-performance computing (HPC) to reduce the challenges of modern computing such as excessive resource usage and running costs of industries. Additionally, Rigetti has several intellectual property (IP) rights/patents whose valuation may boost the stock price soon. Long term, I see the promise of advanced quantum computing continuing to lift these small-cap stocks to new records above their 52-week high.

RGTI outperformed the S&P500 by more than 100% (YoY), driven by positive market advancement through 2024.

RGTI expects strong Q4 2023 earnings to be released on March 14, 2024, after its Q3 2023 revenue increased 10.7% (YoY). This has as a backdrop that the Nasdaq Composite opened the month of March 2024 at a historical price of $16,302.24.

In the technological field, the Nasdaq prevailed thanks to the positive performance of AI-related stocks, such as Nvidia and Meta, slowed inflation and the Fed’s planned rate cuts later in the year.

High performance computing

Rigetti Announced a project associated with the US Department of Energy’s Oak Ridge National Laboratory (ORNL) that would demonstrate the future application of quantum computers. The project would also enlist the services of Riverlane, known for its “quantum error correction technology,” and the results are expected to show how the high-performance computing (HPC) framework can be integrated with quantum devices.

First, a successful integration of these two components (HPC and QC, rather a hybrid quantum system) will help Rigetti win related government contracts, as it is already working with the government to upgrade them. Second, we are looking at the evolution of quantum simulators, which in the past were limited by memory requirements. With improved simulators, it will be easier to perform algorithm research and help debug the generated code. The use of HPC will help in the development of superquantum computers with the ability to overcome memory limitations. Furthermore, by harnessing qubits (applicable in quantum computing) that replace binary bits (used in classical computers), Rigetti will magnify the power of superposition. This feature is appropriate for dynamic cryptography and machine learning, such as computer vision, natural language processing (NLP), etc.

For example, Rigetti recently thrown out its 84-qubit Ankaa-2 quantum computer which, in its description, offers 2.5 times performance growth.

During the announcement, Rigetti CEO Subodh Kulkarni fixed,

“Rigetti’s focus on improving our average 2-qubit fidelity is a crucial part of our mission to build the world’s most powerful computers. Useful quantum computers will need not only large numbers of qubits, but also high-quality qubits. Achieving 98% fidelity on the Ankaa-2 system is the result of years of innovation and commitment from our teams across the technology stack. “Now that the Ankaa-2 system is available to all of our customers and partners, I look forward to focusing on continued progress to accelerate this transformative technology.”

This advance highlights Google’s strategy demonstration way back in 2019, via the 2019 “quantum supremacy” paper, when he calculated “the amplitudes of individual bit strings” using simulation.” At the time, this approach used the algorithmic method called Schrödinger-Feynman, and one challenge he encountered was the expensive nature of the calculation. The circuit depth continued to increase due to the increasing number of patch gates. I believe that this problem will be solved over time by Rigetti’s initiative. quantum systems, as they have a universal gate processing infrastructure “based on tunable superconducting qubits.”

Property rights

In my view, Rigetti has the best chance of increasing its valuation through its intellectual property (IP) rights. The company’s secondary filling. records show that it has at least 152 patents spread across its quantum chips, cloud-based quantum services, and related software. Rigetti’s founder and former CEO, Dr. Chad Rigetti, has invented around 38 patents issued by the US government (as of 2022). In the field of quantum computing, IBM has about 1,323 patents (out of a global number of 122,110), while Google has 762. Rigetti ranks in the top 10, slightly below IonQ with 164 patents.

Currently, RGTI has a market capitalization of $337.18 million and an enterprise value of $260.51 million. In the case of a merger and acquisition (M&A), intellectual property rights are among the factors that will be considered to determine the overall valuation. I believe that intellectual property rights in the field of quantum computing are critical assets that will make the company more attractive, especially since it is in the top 10 in the field. Even more critical is that we will soon have hybrids of quantum computing and artificial intelligence (AI) with investigation emphasizing strong intellectual property portfolios.

In other articleIt was noted that in 2023, more than 600 new patents (for cryptography) had been filed, with companies like “IBM, Microsoft, Origin Quantum Computing, Google, and Baidu” showing the most improvement.

New developments

Rigetti Announced in December 2023 commercial availability/launch of its 9-qubit Novera processing unit (QPU). This system is based on its 4^th Generation Ankaa-class infrastructure “with tunable couplers for fast 2-qubit operations and a 5-qubit chip for testing single-qubit operations.” The price of this new QPU is expected to be $900,000 and reports indicate that it had already sold a QPU to Fermilab in 2023.

Recently, D-wave Quantum Inc. (QBTS) Announced the launch of its novel “go-to-market” (GTM) plan aimed at accelerating the “deployment of commercial quantum technologies.” Through the strategy, D-wave verticals will aim to increase sales and marketing by redesigning its manufacturing/product development and logistics planning. The company also aims to step up government collaborations in 2024, something Rigetti is already doing with the Department of Energy.

Quantinuum, whose majority shareholder is Honeywell, recently Announced the development of a “digital bus-based” system that connects quantum computer qubits instead of “using direct connections” without scalability. It was observed that quantum computer qubits currently use limited scaling functions of 1 to 20 control signals that also experience wiring challenges. With its patented design, Quantinuum aims to solve the wiring challenge while expanding the network to trap and control more qubits. This gives way to more digital connections compared to analog systems.

Risks

Low income

Rigetti has yet to make substantial revenue from its quantum computing business, with revenue of $2.6 million in the quarter ending September 2023. Total revenue for the year ending December 31, 2022 amounted to 13.1 million dollars compared to a net loss of 71.5 million dollars. . However, these revenues were higher than in 2021, which amounted to $8.2 million compared to a net loss of $38.5 million. It will be important to see the amount spent on capital expenditures in 2023 when the fiscal year 2023 report is released, as it spent $22.7 million in 2022.

Qubit decoherence function

Rigetti, like other quantum computing companies, will need to identify a way to shrink qubits. decoherence, an aspect that occurs when “occurs when qubits interact with their environment and lose their coherent characteristics.” According to this research, the benefit of quantum computing is reduced when “qubits decohere to conventional bits.” Furthermore, as we know, quantum computers operate at cold temperatures. Any change in temperature or electromagnetic fields will alter the accuracy of the information stored on these computers. Additional research is needed to develop robust quantum computing devices that can withstand such problems.

Valuation

Rigetti’s Forward Price-to-Book ratio stands at 2.77 versus the industry average of 4.40. This represents a difference of -37.06%, indicating that the stock is slightly undervalued and we may see upside in the second half of 2024. Additionally, Rigetti has a relatively stronger cash balance of $110 million compared to a total debt portfolio of 33.6 million dollars. It also has a total debt-to-equity ratio (MRQ) of 22.94%, showing that it has enough cash to cover its current debt status.

Bottom line

I think Rigetti is a buy with solid earnings potential over the next 12 months. The company is constantly improving its quantum computing technology and has patents that will increase its valuation in the long term. Furthermore, quantum computing is an emerging technological field with high growth potential. Despite low revenue due to technology-related volatilities, the company has already announced the commercial availability of its 9-qubit QPU, a move that will spearhead company-wide revenue collection.

Editor’s Note: This article covers one or more microcap stocks. Please be aware of the risks associated with these actions.