RGTI - Rigetti Computing: Quantum Advantage Remains Elusive

2023-09-08 09:54:11 ET

Summary

• Rigetti, a quantum computing company, has indefinitely pushed back its timeline for achieving quantum advantage.
• In November of 2022, the founder and CEO abruptly resigned.
• They are burning cash and will likely need to do a dilutive equity raise in 2024.

Executive Summary

Founded in 2013 Rigetti ( RGTI ) built its first quantum computer in 2015. They have a facility in California called Fab-1 where they have built successively more powerful quantum computing chips over the years. They went public by merging with a SPAC in early 2022 with lofty projections of future growth. They said they expected to achieve narrow quantum advantage in 2023. They define this as being able to solve a practical, operationally relevant problem significantly better, faster, or cheaper than a current classical solution. Now we’re more than halfway through 2023 and they are failing to deliver on this timeline. In November of 2022, founder and long-time CEO Chad Rigetti abruptly resigned from the company . His successor published a new roadmap saying they will achieve narrow quantum advantage at some indefinite point beyond 2023. In the meantime, the company is burning cash and will likely need to do a dilutive equity raise in 2024. The first quantum computer was created in 1998 , more than 20 years ago and billions of dollars have been poured into the industry. Yet to date, no company has ever proven quantum advantage. Given the speculative nature of the industry along with Rigetti’s precarious financial position, investors should be extremely cautious about the stock.

Quantum Computing

To understand the nascent quantum computing industry, I recommend reading this free report from McKinsey & Company which gives a pretty good overview. Traditional computers perform calculations with binary bits. Each bit can only have one of two values; 0 or 1. Quantum computers, on the other hand, use quantum bits, or qubits. Unlike classical bits that can be either a 0 or a 1, qubits can be both at the same time, thanks to a property called superposition. Qubits also can be entangled due to another quantum phenomenon called entanglement. When qubits become entangled, the state of one qubit is directly related to the state of another. This entanglement can theoretically allow a quantum computer to run complex calculations and simulations far more efficiently than a traditional computer.

With that being said, there are also significant challenges with this nascent technology. Due to the fact that each qubit can be both 0 and 1 at the same time, there is inherent randomness in its output. If you ask a traditional computer what is 1 + 1, it will always give you 2 as an answer. If you ask the same question to a quantum computer, you will get a different answer every time. This doesn't mean the quantum computer is necessarily useless, it just means you have to use it in a different way. Quantum computers could theoretically be used for probabilistic simulations. Even though each individual result is inherently random, if you run a given simulation thousands or even millions of times, you may be able to get useful insights from the distribution of results.

Quantum computers have existed for decades in the research labs of universities, but so far they have failed to demonstrate any significant real-world utility. In 2019 there appeared to be a big technological breakthrough when Google ( GOOGL ) claimed their quantum computer was able to perform a computation in 200 seconds which would have taken the world’s fastest supercomputer 10,000 years to produce a similar output.

While this achievement is technically true, it’s not nearly as significant as it might sound. As explained in this article from Science.org , the computation that the Google quantum computer performed was specifically designed to be difficult for a traditional computer and easy for a quantum computer. It was basically a science experiment to show that the quantum computer can do something, but this is not the same as being commercially viable for any real-world application. This is a very important point that investors need to understand. Just reaching so-called quantum supremacy means very little in of itself. For quantum computing to become truly exciting, we need to see it applied to real-world applications. Quantum computing companies have done a lot of interesting science experiments but have thus far failed to solve any real world problems.

Rigetti

Despite the lack of proven real-world use cases, Rigetti has been able to generate revenue. In 2022, they generated $13.1 million of revenue and in the first half of 2023 they generated $5.5 million. So where is this revenue coming from? Enterprises are paying them to do calculations with their quantum computers. But these are for experimental research projects as opposed to real-world business applications. In their 2022 10K, they listed their top customers and partners as:

“Amazon Web Services, Ampere, Astex Pharmaceuticals, Deloitte, Microsoft, Nasdaq and Standard Chartered Bank, along with U.S. government organizations such as DARPA, DOE, and NASA”

We can disregard Amazon ( AMZN ) and Microsoft ( MSFT ). Rigetti partners with Amazon and Microsoft to make Rigetti's quantum computing services available on their respective cloud computing platforms; AWS and Azure. They themselves are not end customers. So let's look at each of their end customers to see what they’re doing with Rigetti.

• Ampere partnered with Rigetti to " optimize quantum computer simulation software ".
• Astex Pharmaceuticals partnered with Rigetti to " develop an integrated application for simulating molecular systems".
• Deloitte is “ exploring quantum applications in material simulation, optimization, and machine learning using Rigetti’s new scalable processors ”.
• Nasdaq is working with Rigetti to “ pursue the development of quantum applications to help solve high-impact computational problems in the financial industry ”.
• Standard Chartered Bank is “ experimenting with how quantum machine learning can improve volatility predictions in financial markets ”.
• DARPA and NASA jointly gave Rigetti a grant “ to develop a full-stack system with proven quantum advantage for solving real world problems ”.
• The US Department of Energy selected Rigetti to “ lead a quantum simulation project for fusion energy ”. Subsequently, they sold a quantum processing unit to an undisclosed national lab in the second quarter of 2023. National labs are US government owned research institutions.

All of these customers are using Rigetti’s quantum computers for experimental research and development purposes. None of them have yet solved any real-world problem. At least nothing to this effect has been disclosed publicly. Rigetti can generate a few million dollars per quarter with these experimental R&D contracts. But for revenue to grow significantly, they need to achieve quantum advantage and start solving real-world problems.

Liquidity

In February of 2023, Rigetti laid off 50 employees representing 28% of their total headcount. Even after the layoffs, they still burned $19 million of negative free cash flow in the second quarter.

They borrowed $27 million from Trinity Capital ( TRIN ) in multiple tranches with effective interest rates between 21% and 28%. $5.5 million of this debt comes due in the remainder of 2023, $13 million comes due in 2024 and $9 million comes due in 2025. As of June 30th 2023 they had $105 million of cash and available for sale investments. At the current rate of cash burn, this will only get them through the third quarter of 2024 and they won’t have the cash on hand to make their $13 million principal payment to Trinity Capital. This lines up with Rigetti’s own outlook that they anticipate needing to raise additional capital by late 2024 or early 2025 . Given the exorbitant interest rates they had to pay for their previous debt raise, future capital raises will almost certainly be equity. Rigetti has a market cap of ~$280 million and is burning $19 million per quarter. At this rate, they will need to increase their share count by ~7% every single quarter. If you invest in Rigetti you’re basically funding a cash-burning research lab with the hope that it will eventually turn into a viable business.

How Long Until Rigetti Can Achieve Quantum Advantage?

This is the key question for investors. How much more time and capital will Rigetti need before their quantum computers can be useful for real world applications? Honestly, I have no idea, and I don’t think the company itself does either. In their 2021 SPAC presentation, they said they expected to achieve narrow quantum advantage by 2023. They define narrow quantum advantage as “ the point at which a quantum computer is able to solve a practical, operationally relevant problem significantly better, faster, or cheaper than a current classical solution ”

In November of 2022, founder and long-time CEO Chad Rigetti abruptly resigned from the company without explanation. He was replaced by a new CEO, Dr. Subodh Kulkarni who was previously the CEO of a small cap X-ray inspection company. Upon taking the top job, Kulkarni updated the strategic plan and the company published a new presentation in August of 2023. In the presentation, they don’t give an exact timeline of when they expect to achieve narrow quantum advantage. They just say it will be after 2023.

Given that the company itself appears unsure about when they will achieve quantum advantage, how can we as outside investors have any confidence? Until they achieve quantum advantage, or at least give us a realistic and definite roadmap of when they can achieve this, I would not be a buyer of the stock.

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