RGTI - Rigetti Computing: Accelerated Roadmap And Potential Synergy With Generative AI

2023-06-14 12:33:28 ET

Summary

• Rigetti is a QC or Quantum Computing company whose share price is only slightly above the one-dollar mark.
• It is amid a restructuring plan and its accelerated roadmap appears to be working.
• Thus, it could deliver more sales, and based on the Price-to-Sales multiple when compared to competitor IONQ, RGTI stock is a buy.
• My bullishness is also due to QC being synergistic with Generative AI which powers ChatGPT.
• However, it is important that enthusiasm does not mask the risks associated with trading the stock.

If you are taking the time to read this article, it means that you are interested in investing in AI-related hardware, and could have missed the Nvidia (NASDAQ: NVDA ) train. Now, with a price-to-sales which is one-third of the semiconductor giant whose market cap has surpassed the $1 trillion mark, there is Rigetti Computing ( RGTI ) whose share price is only 31 cents above the $1 Nasdaq compliance level, meaning that it faces a high probability of delisting risks in case of volatility

Moreover, Rigetti is not profitable, but, it is amid a restructuring exercise, and its technology could act as a diversifier to those invested in Generative AI that powers ChatGPT. Thus, this thesis makes the case for investment in the penny stock, as in addition to executing on an accelerated technology road map, its QC or Quantum Computing could have a synergistic relationship with AI.

I start by elaborating on the business and competition.

The Quantum Computing Industry

First, QC is different from ChatGPT-style AI which is powerful at extracting data from the vastness of the internet and summarizing it in a commonly used language format. On the other hand, QC is more about accomplishing the largest number of computing tasks possible in a single operation. Here, by making use of the principle of quantum mechanics, it is about executing complex number crunching faster than classical computing powered by processors from Intel (NASDAQ: INTC ), Advanced Micro Devices (NASDAQ: AMD ), and even Nvidia.

Moreover, while AI is about developing algorithms that learn and are able to "think", QC's approach is to make computers more efficient. Therefore, since they both aim to provide mankind with faster solutions, their aims are not so different and, to this end, Rigetti develops quantum processing units or QPU chips used in specialized servers. This is offered to researchers by Amazon (NASDAQ: AMZN ) on its AWS cloud as pictured below, somewhat analogous to Nvidia's chips available to developers through Microsoft's (NASDAQ: MSFT ) Azure cloud.

Looking further, Amazon also offers QPUs from IonQ ( IONQ ) which is one of Rigetti's competitors. Therefore, while this is a highly innovative research industry, it is also characterized by competition, or about gaining or losing market share. In this case, as shown by the quarterly revenue progressions for the last eleven quarters ending in March 2023, it is IONQ , as illustrated by the orange chart which has been successful in sustainably winning more orders. In contrast, Rigetti's blue chart has been more erratic which shows that its growth is less predictable, with sales growing at only 4.61% during its latest quarter, compared to a whopping 119% for IONQ.

To address this problem, which was already expected since last year, there was a restructuring.

The Restructuring and Technology Roadmap

Changes were also brought to the technological roadmap in September last year but, this failed to support the share price which at that time was about $3 down from its August 18 peak of $5.67 as per the chart below). Now, this peak had been achieved on the back of a change in the board chairman in July, positive earnings results, and the company making its entry in the Russel 3000 Index.

Subsequently, the CEO was replaced with Dr. Subodh Kulkarni, with the stock trading at around $0.8 at that time. However, it was only after the announcement of a managerial reorganization together with downsizing as much as 28% of the workforce in February that the stock eventually climbed to the $1.39 level, thereby avoiding a delisting. However, for a sustained stock upside, the company needs to deliver growth and for this purpose, it has seen progress in the execution of its roadmap (diagram below), also designed to improve operating efficiency and preserve cash.

Going into details, the next generation 84-qubit (quantum bits) Ankaa-1 system has been tested within Rigetti in March 2023 and achieved a 96%-97% median 2-qubit fidelity compared to the previous generation 80-qubit Aspen M-3 which comes with 94% to 95% fidelity. As for product launch, the Ankaa-1 will be available to select customers by mid-2023, with the Ankaa-2 with a fidelity of around 99% expected to be deployed and made available to external customers in the fourth quarter of 2023.

To make sense of it all, the key here is to reach a 99% fidelity level which means wider adoption by researchers and government agencies, which mostly constitute Rigetti's customer base.

Now, in order to tap into a larger customer base, it is essential to reach "Quantum Advantage" or when QC solves a mathematical problem faster than a classical computer, which is supposed to happen in " roughly two to three years from now", or in 2025-2026.

Burning Cash, but could see more Sales

Well, this is a long time frame which also implies more risks that things go wrong along the way. Furthermore, despite both Rigetti's and IONQ's gross profit margins for FY'22 coming above 75% , both companies are loss-making. Thus, Rigetti's operating income was $-100.7 million last year, with $66.5 million more losses than those incurred in 2021. As a result, the company burnt 62.5 million dollars of cash in operations with the balance sheet containing $142.8 million of cash at the end of last year. This is expected to drop to $65 million to $75 million by the end-2023.

Now, there has been some expense reduction thanks to the restructuring with the new management prioritizing a more disciplined capex usage, but, to be realistic, in order to attain business objectives, additional funding should be raised by late 2024 or early 2025. Consequently, this is not the type of stock you want to own especially when monetary policy remains tight and borrowing costs remain high despite the high probability of a Fed pause as more people are skewed towards profitability when screening for stocks to invest in.

Still, with total debt and equity of $37.4 million and $129.5 million respectively, or a debt/equity ratio of less than 30%, things are not desperate. Continuing on a positive note, while cost-cutting helps to attenuate the effect of the cash burn on the balance sheet, an accelerated roadmap increases the likelihood of additional revenues helping the income statement in the second half. Consequently, there is less probability of missing EPS and Revenue estimates, which, anyway have already been revised lower for FY'23. This in turn reduces the catalysts which can force the stock to descend below the $1 level.

To support production and sales, Rigetti can rely on an elaborate partnership ecosystem as pictured below. This also includes its own cloud infrastructure for researchers to access QC on a leasing model, instead of purchasing QPUs.

Therefore, optimism is justified.

Yet, there is another reason to be bullish, as, if one takes some time to think about it, QC may have a synergistic relationship with Generative AI.

The QC-Generative AI Synergy

Now, classical computer chips have evolved faster, but, as per research by Microsoft, there is a limit to their problem-solving ability and there is also mention that QC should address these limitations. Also, this is a field where the software giant remains invested with its CEO, Satya Nadella mentioning during the January Davos meeting that "Microsoft will achieve quantum supremacy and aims to build a general-purpose quantum computer".

Elaborating further, on the synergy aspect, while Nvidia's H100 tremendously accelerates the time it takes for intelligent algorithms to learn through the tons of data that populate the internet, it still uses classical computing principles, and, will eventually face performance limitations simply due to having aroused mankind's "insatiable" appetite for Generative AI. For this purpose, research by Defiance shows that as the amount of data grows exponentially and becomes more complex, there will be a need for a different technology to extract value from them and this is where QC could get traction. This implies that Generative AI and QC do have a synergistic relationship and, Defiance which is an investment advisor bases its research on the work of several experts who have a deep understanding of both QC and AI.

Looking at financing perspectives for a company burning cash, with several companies including SoftBank ( OTCPK:SFTBY ) increasing their bets on AI, Rigetti may not find it too difficult to obtain research funding. However, it would be foolish to invest in IONQ which is trading at 155 times trailing revenues, when you have lower valued Rigetti at just 11.37x.

Assuming a P/S of 15.6x or just one-tenth of IONQ, I have a target of (15.6/11.37 x 1.31) of $1.8, which remains well below Seeking Alpha's ratings .

Investing in the Penny Stock

The reason for applying some moderation is that till Rigetti attains QC advantage, expect revenues to remain subdued due to cost-sharing arrangements with researchers, or development contracts depending on reaching certain milestones. These are far from the advanced bookings and upfront payments which boosted Nvidia's revenue guidance for its second quarter of 2024 as a vendor of classical AI chips.

Furthermore, investors should be aware that penny stocks may face liquidity problems in case large shareholders want to pull off quickly which can adversely impact the price.

In conclusion, the improvement in fidelity shows that the accelerated execution of the roadmap appears to be paying off. Also, the current share price may constitute more of an entry point for those looking for AI diversification, as the company delivers on sales, which will, in turn, depend on whether customers' interests in Rigetti's QC are sustained.

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