RGTI - Revisiting Rigetti Computing: Management Change To Drive Growth?

Summary

• In my first post of Rigetti Computing, I emphasized the firm had not figured out how to make money.
• Its quantum computing pedigree and government customer base have made progress perhaps slow.
• But there is a new sheriff in town, with a track record of selling businesses.

Recap

When I initially covered Rigetti Computing ( RGTI ) back in September , I was smug with skepticism. I had spent time studying the financials, going over the investor presentations, and calls.

Ok, it was an incredibly interesting futuristic business – think big data, artificial intelligence, advanced robotics, nanotechnology, or perhaps Deep Blue . Maybe even go out on a limb and think HAL 9000 from Kubrick’s masterpiece 2001: A Space Odyssey . Yes, I know – I am incredibly dated.

The 9000 series is the most reliable computer ever made. No 9000 computer has ever made a mistake or distorted information. We are, by any practical definition of the words, foolproof and incapable of error

-HAL 9000 (A Space Odyssey)

But the last thing I could think of trawling through copious amounts of financial data was “think profits”. Even revenues are conceivably hard to imagine up. The crux of my initial detailed analysis of the company was, as futuristic as it may be, as engaging as the technology was promising, monetization was as remote as the moons of Jupiter once explored by Dr. Bowman.

Since my last article , Rigetti has continued its seemingly endless move downwards.

And now Chad Rigetti himself has started selling stock – 234,569 shares worth $227K on December 12 to be precise. Its not really the monetary value or even the number of shares that raises eyebrows here. But rather, if the pitch on product development progress was so compelling, why start handballing shares right now? Why?

When the stock price is at all-time lows. It’s perhaps a tough pill to swallow for backers who have seen the stock capitulate, losing -90% of its value since inception. “Regretti” may be a more fitting company name for investors who loaded up on stock only to see their capital eviscerated.

Yet times are changing. Chad has decided to hang up his CEO boots, opting to name Subodh Kulkarni as President & Chief Executive Officer. Maybe Chad’s equity fire sale correlated to him giving up the reigns?

In any case, only time will tell how Subodh fares. He has the pedigree of being a true home run – M.I.T, and work experience at the most senior levels with IBM, 3M, Imation, Ardent & CyberOptics – a fully owned subsidiary of Nordson Corporation.

Nordson’s takeover of CyberOptics for $54 per share , albeit a 47% premium over its July 2022 price, perhaps gives insights into Rigetti’s fate. Is the company simply too hard to manage? Should it just be sold?

My outlook has not changed since my last article. Despite an unchanged short rating, I emphasize emphatically a word of caution to anyone holding short equity. Subodh has a track record of selling companies. If that is any indication of things in store for Rigetti, short equity could get literally blown out of the water if a deal is made. You have all been warned.

Analyst expectations of sales growth are lofty despite the world going into a global recession.

Latest Developments

The quantum revolution is coming. Yet American futurist Roy Charles Amara perhaps summed up the intrinsic issues with Rigetti Computing.

We tend to overestimate the effect of technology in the short run and underestimate the effect in the long run.

-Roy Charles Amara.

Buzz words such as artificial intelligence, autonomous driving, digital currency, the block chain, and even quantum computing can only ultimately be validated several years, or even decades, after all the initial hype takes place. Short term investors and fleeting finance make possibly for a poor coupling.

Despite awful price action since inception, analysts have high hopes for the equity following Subodh Kulkarni’s arrival.

Sales over last 12 months have been ~$9.2M with efforts required to hit analyst targets of $12M (CY 2022E), $24M (CY 2023E), and $45M (CY 2024E). Interestingly, the 4 analysts covering the stock do not see the firm in the black until after 2024.

That is some wait regardless of the cash the firm had on hand. Notwithstanding, a degree of enthusiasm has hit the analyst community with 2 hold ratings, 1 buy rating and 1 strong buy rating. Average price target is $2.50 – some 179% above current traded price. What did I say to you about Subodh’s arrival, his corporate pedigree and the dangers of short selling?

Some of the $184M in cash and cash equivalents reported in my previous post has been deployed, with $161M now available in a mix of cash ($73.8M) and short-term securities ($87.2M) LTM. SPAC proceeds seem to be conservatively used, which is good news because the firm has next to nothing in terms of sales.

Revenue generation remains highly dependent on government agencies.

Free cash flow has continued to be impacted since last reported with LTM free cash flow at (-$78.8M) compared to -$67.2M in my previous report. Interest paid has moved to the upside too ($3.3M) $37M in stock based compensation of which $15M was allocated in Q3 is possibly the cash required to get Subodh Kulkarni onboard.

Let’s hope he can take the stock price to the moon or engineer a sale. All in, cash from operations LTM has been pretty ugly (-$57.6M) but that could be expected given the investments needed to get the venture firing on all cylinders. $6.1M of common stock was also issued over the last 12 months with $5.1M of that coming in Q2, 2022.

Risk

Risk has not gone away for Rigetti Computing. The quantum computing firebrand has provided little inroads into making money. It has however managed to hire a new President & Chief Executive Officer. That too comes with risk but if Mr. Kulkarni’s track record is anything to be judged by, it trumpets stability and deal making.

Government clients imply the company’s revenue streams are heavily correlated with political cycles and changes of administration.

The company aims to bolster its government business at a time where spending may be diverted to economies deep in recession. While defense remains a critical and recession proof aspect of Rigetti’s book, it remains to be seen how much state sponsored interest can be garnered.

Key Takeaways

Financially, not a great deal has changed since I last left Rigetti Computing. Sales are lackluster, profits nowhere really to be seen and nothing doing on the cash flow side. But the most important thing to takeaway is the company has a new leader.

Mr. Kulkarni appears to be a textbook dealmaker with a pedigree of stability and leadership nous. That perhaps is a comforting change. Chad can go back to doing what he does best – quantum physics and geeking out over hardware specs.

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