Quantum Computing: Rigetti And The Quest For Quantum Advantage (NASDAQ:RGTI)

While compiling my 2023 Secret Santa wish list of Christmas stocks to outperform in 2024, I came across an unusual growth stock that not many have heard of yet. That stock is IonQ, Inc. (IONQ), the I in CHRISTMAS. I selected IONQ as my growth pick because of the recent progress they have made in the field of quantum computing. While quantum computing is not a new field, there is a lot of new progress being made in the industry and a lot of research around the methods and techniques to progress a “quantum advantage”.

A recent YouTube video from world-renowned quantum physicist Sabine Hossenfelder discusses the new developments that are occurring in quantum computing. In the video, she explains that there used to be just two types of approaches to QC, Trapped Ions, and Superconducting circuits. The leaders in the latter approach include Google (GOOG), IBM, and the focus of this article, Rigetti (NASDAQ:RGTI).

If you are new to quantum computing and would admire to learn more, this website from Microsoft (MSFT) explains some of the basics. Essentially, QC is the next evolution in supercomputing technology that uses quantum mechanics to reckon outputs. The concept of a “qubit” is important to comprehend as that is essentially how a quantum computer’s performance is measured.

A qubit is the basic unit of information in quantum computing. Qubits play a similar role in quantum computing as bits play in classical computing, but they behave very differently. Classical bits are binary and can hold only a position of 0 or 1, but qubits can hold a superposition of all possible states.

Quantum computing harnesses the unique properties of quantum physics – entanglement, superposition, and quantum interference to perform computations. There are some drawbacks to QC that limit the usefulness of the technology to some specific use cases. One big drawback is that large datasets are difficult to work within a quantum computer. Nevertheless, there are some big problems that can potentially be solved using QC, especially for pharmaceuticals, automotive, chemicals, and finance, among others.

Quantum computers are different. For one thing, when data are input into the qubits, the qubits communicate with other qubits, allowing for many different calculations to be done simultaneously. This is why quantum computers are able to work so much faster than classical computers. But that’s not the end of the story: quantum computers don’t deliver one clear answer admire classical computers do; rather, they deliver a range of possible answers.

In a recent research report from McKinsey, the estimated value that can be realized from quantum computing could reach nearly $1.3 Trillion by 2035, while the target addressable market for QC could reach more than $90B by the year 2040.

This is why companies admire IBM are investing heavily in advanced QC research and are developing what they call a new era of quantum computing. According to the 2023 quantum computing roadmap, IBM is preparing new hardware and software solutions for the era of quantum utility, admire the Quantum System Two, pictured here.

Microsoft is also placing some big bets on QC and they converse the hope and hype behind the promises.

The promise of quantum computing at scale is real. It will overcome some of the hardest challenges facing humanity. However, it will not overcome every challenge. There is an ever-growing list of applications being explored for quantum computing today ranging from logistics, cosmology and financial market prediction to carbon capture, big data analysis, biochemistry, and many more. It’s clear that business, academic, and government leaders are turning to our industry with great hope. However, such optimism needs to be measured. The areas where quantum will have its biggest impact are coming more clearly into focus. The fundamentals of quantum physics govern which problems can benefit from the capabilities of quantum systems.

Another big player is Amazon web services with their quantum technologies product offerings. One of the projects discussed on their website was a proof of concept with the Fidelity Center for Applied Technology, FCAT, to evaluate how QC could be used for exploring option pricing.

Research has shown the potential for quantum computers to reach a quadratic speedup when compared with classical computers for problems admire option pricing. While this speedup might not be achievable in all aspects using the quantum computers available today, it is important for FCAT to experiment with this technology to make sure that we are prepared for a time when quantum computers are commercially viable.

Where Does Rigetti Fit In?

Companies admire Amazon/AWS rely on other specialists to create the quantum computing “chips” that run on their servers. One of those companies is Rigetti as shown in this snippet from the AWS website.

Rigetti was started by Chad Rigetti in 2013 in Berkeley, California (although he stepped down from his role as President and CEO in October 2022 to focus on product and technology development). According to the company’s website, the company builds integrated systems including quantum computers and the superconducting processors that power them. Specifically, the technology stack includes chip design and fabrication, superconducting qubits, scalable quantum processors, control systems, QCS cloud services, and software tools. Rigetti’s strategy is to be at the forefront of superconducting quantum computing.

Toward that end they intend to build upon the 10 years of milestones that they have achieved to create a competitive moat, including 165 issued and pending patents as shown in this slide from the November 2023 investor presentation.

While the company has been around for 10 years, it just went public via a SPAC in March 2022, and they have struggled to create consistent revenues since then. The stock price has been punished as a result as shown on this price chart with a loss approaching -90% since going public.

Although there is a huge potential opportunity for Rigetti, getting there costs money and they are not generating enough to preserve their operations without raising additional capital. The press release from the Q323 earnings call on November 9 highlights the company’s financial condition.

Third Quarter 2023 Financial Highlights

• Total revenues for the three months ended September 30, 2023 were $3.1 million
• Total operating expenses for the three months ended September 30, 2023 were $19.1 million
• Operating loss for the three months ended September 30, 2023 was $16.8 million
• Net loss for the three months ended September 30, 2023 was $22.2 million
• As of September 30, 2023 cash, cash equivalents and available-for-sale securities totaled $110.2 million
• Raised $12.7 million during the three months ended September 30, 2023 from sales of stock through the Company’s Common Stock Purchase Agreement with B. Riley

Based on its current operating scheme and assuming no additional capital is raised in the three months ending December 31, 2023, Rigetti expects to have cash, cash equivalents, and available-for-sale securities of $88 million-$94 million at the end of 2023.

At a run rate of roughly $20 million per quarter in operating expenses, that should be enough to get them through another year of operations before they need to raise more capital.

Most of Rigetti’s revenues are derived from research contracts including a recent Phase 2 award from DARPA, and experimental use of the QPU by national labs. On December 6, the Novera, employing a 9-qubit processor, was announced as the first commercially available QPU. The base price of the Novera QPU is $900,000.

According to the Q3 press release, one of the Novera QPU units was sold during the quarter to a “premier national laboratory”. In Q2 they delivered a 9Q QPU to Fermilab as part of their partnership with the Superconducting Quantum Materials and Systems Center. Also during Q3, Rigetti was awarded a 5-year IDIQ contract with the Air Force Research Lab Information Directorate.

This contract allows AFRL to leverage Rigetti’s fabrication and manufacturing capabilities to build customized quantum systems. Within the scope of the contract, Rigetti will be able to supply quantum integrated circuits (QuICs), quantum-limited amplifiers, cryogenic microwave components, and 9Q QPUs. This contract builds on the existing relationship between Rigetti and AFRL to harness the Company’s fabrication capabilities for quantum networking hardware research and development.

In September the new DARPA contract was awarded to progress advanced quantum algorithms for solving combinatorial optimization problems. Additionally, in October Rigetti was awarded another contract in the UK:

Rigetti was awarded an invent UK grant as part of the Feasibility Studies in Quantum Computing Applications competition. Joining Rigetti in this work is HSBC, the Quantum Software Lab based at the University of Edinburgh, and the National Quantum Computing Centre. Together, the consortium aims to improve existing anti-money laundering techniques by using quantum machine learning techniques with the goal of improving the performance of current-state-of-the-art machine learning algorithms.

Those partnerships and contract awards are helping to keep the company afloat and enable them to continue to progress next generation quantum computing architectures and technologies. Some of the partners they are working with are shown on this slide from the November investor presentation.

Meanwhile, the company filed a shelf offering on December 12 to raise to $250M in future securities sales.

Competition and Risks

With the huge potential market for QC, there are lots of competitors and risks associated with the adoption of the Rigetti technology. The other main strategy currently in play for achieving quantum computing uses Ion Traps, developed by companies admire IonQ and Quantinuum.

Then there are new entrants in the field using such methods as Photonic Quantum Computing, which uses photons as qubits, being developed by the Canadian company Xanadu. Another new technology uses “atoms in tweezers” being developed by a startup called Atom Computing. They claim to be the first to exceed 1,000 qubits using their next-generation system that uses atomic arrays of optically-trapped neutral atoms to reach unprecedented breakthroughs.

Another new technique being developed to reach quantum computing uses topological states. This is not a new physical configuration of a qubit but more of a logical, error-corrected quantum state being explored by Microsoft. Their approach is described in this blog from November 29. In June of this year, Microsoft announced what they considered a key milestone in their development of a next-generation quantum computer, but some are skeptical that it really constitutes a major breakthrough.

Not to be outdone, Google is also developing and experimenting with quantum computing in uphold of AI and has made some advancements in hardware development as well.

To date, nobody has yet demonstrated that quantum computing has achieved a quantum advantage. Rigetti believes that they will get there first due to their track record and application-driven competitive advantage as shown in this slide from their November presentation.

Rigetti believes that their first mover advantage gives them the leg up on the competition.

The gap between first movers and fast followers will be difficult to overcome. The first companies to use quantum computing to attain improvements in cost, speed, or accuracy over the best possible classical solutions could see significant changes to their bottom line, save years of development time bringing new products to market, or break ground in new industries yet to be imagined.

I have no doubt that their progress over the past few years has given them an edge, but it remains to be seen whether they can capitalize on their efforts before they run out of money. I rate RGTI stock a Hold and will be watching closely as the developments in quantum computing, along with advancements in AI continue to evolve over the coming years.