Key Points
-
Rigetti was one of a handful of quantum computing companies selected by the Commerce Department for up to $100 million in funding, sending shares flying.
-
The company’s latest system boasts 99.9% fidelity, but that still means 1 error per 1,000 operations — about 1,000 times too error-prone to be commercially useful.
-
While Rigetti has $443.5 million in cash and minimal debt, accelerating R&D costs and the long road to viable quantum computing likely mean more dilution ahead.
- 10 stocks we like better than Rigetti Computing ›
Rigetti Computing‘s (NASDAQ: RGTI) quantum systems may one day crack problems that classical (ordinary) computers never could, like designing novel drugs or designing materials from the ground up. That day has yet to come, but the company, along with competitors like IonQ and D-Wave Quantum, is racing to create a computer powerful enough — and, critically, reliable enough — to do so.
Recently, the U.S. government made getting there a priority, placing Rigetti and a handful of other quantum firms on a short list of companies it’s willing to back with public money. The company signed a letter of intent with the Commerce Department for up to $100 million over three years. The stock was up nearly 70% to just over $27 following the announcement, but has fallen since, now hovering around $16.60 as of July 8.
So, is now the time to jump in? Is Rigetti stock a buy below $20?
The bull case
Rigetti has the blessing of the Commerce Department
That government deal is a great place to start for the bull case. Being one of a handful of quantum companies chosen is a validation of Rigetti’s work so far and its potential in the eyes of the federal government. It also means Rigetti gets an infusion of cash to help it continue its efforts for years.
Rigetti has made real technical progress
The basic building block of a quantum computer is a qubit, the quantum version of the 1s and 0s in a normal computer. In general, the more, the better.
But raw qubit count is only one part of the picture. Even more critical is how error-prone these qubits are, what the industry calls fidelity.
Rigetti has made real strides here. Its latest system, the Cepheus-1-108Q, has 108 qubits with a single gate fidelity rate of 99.9%. That’s a big jump from the 99.5% fidelity achieved by a prior system with 84 qubits just 18 months ago.
Rigetti has a balance sheet with room to breathe
In an industry very much still in research and development mode, a healthy balance sheet is of utmost importance. Rigetti is in a relatively solid position with $443.5 million in cash and short-term investments and minimal debt. With how much it’s spending, that should give the company roughly three years of runway.
The bear case
The government award isn’t final yet
The agreement that was signed was a letter of intent (LOI), meaning it is non-binding. The stock jumped on the news, but there’s a non-zero chance the funding never comes through. If it does, the investment isn’t free. The government gets an equity stake and dilutes current shareholders in the process.
The fidelily headlines are a bit misleading
A 99.9% fidelity rate is genuinely a major jump in the right direction, but there is much further to go than the number implies. When the average investor reads that, it seems that Rigetti is right on the edge of achieving near-perfect fidelity. It’s not.
It makes it much clearer if you flip it around to the error rate. A 99.9% fidelity becomes a 0.1% error rate. That means there is an error in 1 out of every 1,000 operations. For these systems to produce meaningful work, they need to be performing millions of calculations every second — thousands of errors a second at current rates. And remember, errors compound.
Classical computers today have error rates on the order of 1 out of every quadrillion — a billion billion — operations.
Because of the nature of quantum systems, they can’t match the error rate of classical systems, but, thankfully, they don’t need to. They do, however, need to hit something on the order of 1 in 1,000,000 to begin to be truly useful.
That’s a 99.9999% fidelity rate — about 1,000 times less error-prone than Rigetti’s latest system.
Spending is an issue
While the company’s balance sheet gives it room to breathe for now, cash burn is increasing — a trend that is likely to accelerate as the level of difficulty in developing the technology increases. And that’s before any major ramp from manufacturing systems at scale when that time comes. There is likely to be much more need for capital raising — and dilution — before revenue ramps to match expenses.
The bottom line
Of course, at the end of the day, all of this hinges on whether — and when — Rigetti can deliver real, commercially viable quantum computers to the market. If you are on board with the more optimistic timelines and you believe Rigetti will be the one to do it, then today’s stock price is justifiable.
If, like me, you think things are going to take a lot longer than bulls hope, Rigetti is a pass anywhere near $20.
Should you buy stock in Rigetti Computing right now?
Before you buy stock in Rigetti Computing, consider this:
The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now… and Rigetti Computing wasn’t one of them. The 10 stocks that made the cut could produce monster returns in the coming years.
Consider when Netflix made this list on December 17, 2004… if you invested $1,000 at the time of our recommendation, you’d have $407,004!* Or when Nvidia made this list on April 15, 2005… if you invested $1,000 at the time of our recommendation, you’d have $1,244,599!*
Now, it’s worth noting Stock Advisor’s total average return is 924% — a market-crushing outperformance compared to 210% for the S&P 500. Don’t miss the latest top 10 list, available with Stock Advisor, and join an investing community built by individual investors for individual investors.
Johnny Rice has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends IonQ. The Motley Fool has a disclosure policy.
