A Quantum Frenzy

What’s afoot with quantum computing stocks?

Over the last couple of years, they appeared to have been left for dead.

Their stock charts were painful. The publicly traded, small-capitalization quantum computing stocks were obvious victims of the record-setting interest rate hikes of the last few years.

Limited revenues, heavy research and development (R&D) costs, and the certainty of needing to raise additional capital made these stocks very unattractive to institutional capital.

It also didn’t help that the three most prominent quantum computing small caps – D-Wave, Rigetti, and IonQ – all went public via a reverse merger with SPACs.

Massive redemptions by financial institutions at the time of the SPAC mergers – which had no interest in holding long-term positions in these companies – resulted in all three companies raising a fraction of the capital that they had hoped.

This only quickened the need to raise additional capital through secondary offerings, resulting in further dilution.

It was unfortunate… because all three companies, which are each pursuing different technical approaches to quantum computing, all have solid technology and great promise.

And quantum computing is the future of computing. It’s the computing technology that will literally make Moore’s Law irrelevant.

As we explored in yesterday’s Bleeding Edge – Google’s Quantum Breakthrough, with each quantum bit (qubit) added to a quantum computing system, the computational power of the quantum system grows exponentially.

That’s why quantum supremacy is so revolutionary. It’s an entirely different scale for computational power.

A single quantum system – capable of fitting inside a small room – can outperform the world’s most powerful supercomputers at a level of efficiency impossible for classical computing systems.

But we’re years away from having universal fault-tolerant quantum computers. Great progress is being made, but there are still major milestones that must be achieved before we get there. We saw that in Google’s quantum roadmap in yesterday’s Bleeding Edge.

Which is why this sudden hysteria in quantum computing came as such a surprise.

A Quantum Frenzy

Take a look at D-Wave (QBTS), one of the OGs of quantum computing that has been around since 1999.

D-Wave specializes in quantum annealing, a near-term, more practical approach to using quantum computing for optimization problems.

D-Wave rocketed as high as 466% since its October lows and is still up 361% after the pullback in the last couple of days.

This is for a company that is basically out of cash, unprofitable, needs to raise money to avoid bankruptcy, and is now trading at a valuation almost 80 times annual sales.

Or how about IonQ (IONQ), a quantum computing company that I’m bullish on in the long term? IonQ uses a trapped ion approach to quantum computing.

Trapped ion quantum computers have the benefit of having the highest fidelity compared to other quantum computing approaches making them more pragmatic in the short-term.

IonQ has been generating revenues but is deeply unprofitable. And it’s burning through more cash than the others – more than $100 million a year – which will result in it, too, needing to raise additional capital, probably in about 24 months.

And yet, its stock rose 385% since mid-September and is still up 267% after the pullback. IonQ now trades at an enterprise value to sales of 146. That’s a valuation equivalent to 146 times this year’s annual sales!

Or how about my long-term favorite quantum computing stock Rigetti (RGTI)? It uses a supercomputing approach to quantum computing, using semiconductor manufacturing techniques to produce a quantum semiconductor that has the very best scaling potential in quantum computing.

Rigetti is up a stunning 810% since mid-October. And as of yesterday, it didn’t pull back like the others.

Why?

Rigetti’s approach to quantum computing is the same technical architecture as Google Quantum AI’s approach. Given Google’s announcements this week, it’s no surprise Rigetti is the most popular. Google’s breakthrough is a validation of Rigetti’s approach.

In fact, Rigetti was the first pure play on universal quantum computing and has been leading the market in commercializing superconducting quantum computing. It, too, is unprofitable and burning through cash. It will need to raise capital within the next year and is now trading at 177-times 2024 annual sales.

What was it? Why the sudden institutional interest in small quantum computing companies burning through so much cash?

The Google Catalyst

It’s all coming from a series of events that began in September, which perked institutional interest. For anyone not following the industry, you would have never known.

As I mentioned in yesterday’s issue, for about four years, there wasn’t a whole lot being made public about what Google’s Quantum AI lab was up to. The team was very secretive about what it was working on, so it was hard to know how much progress was being made.

But September marked the beginning of events that led up to this week’s announcement.

On September 10th, Sergio Boixo spoke about Google’s quantum computing program at the Quantum World Congress.

This was followed days later with a presentation during the IEEE Quantum Week as a keynote speaker.

And then on October 1st, Google’s Quantum AI Lab shared a minute-long video of what was clearly a new quantum computing system.

Then mid-month, Google published new research on phase transitions in quantum computing and random circuit sampling (RCS), the methodology Google uses to measure quantum computing performance.

And then on November 20th, the big one hit: An announcement from Google’s DeepMind division announcing its most recent breakthrough, AlphaQubit, a new artificial intelligence capable of identifying errors in quantum computing systems designed to radically enhance quantum error correction.

And on the same day, Google QuantumAI announced that it partnered with NVIDIA-enabling software developers to work with NVIDIA’s CUDA software libraries on Google’s quantum computer.

This was a smart move by both companies. NVIDIA has the largest developer community in terms of writing AI applications for GPUs. Allowing developers to use CUDA software libraries on Google’s new quantum computing platform removes the potential friction of having to learn a new software platform to run software on Willow (Google’s new quantum chip).

And if that wasn’t enough excitement, two days after that, Amazon announced its own Quantum Embark program to help its cloud service customers have access to all the major quantum computing systems hosted by Amazon Web Services and accessible in the cloud. That means that Amazon will be buying a lot more quantum systems to serve its cloud services customers.

It was an absolute frenzy.

It was clear that Google was signaling a major announcement with its public offensive. And when the announcement from DeepMind came out on AlphaQubit – with an answer about how quantum error correction could be improved – that was it.

Lift off…

Fair Warning

Incredibly, during this window, there weren’t any major developments at D-Wave, IonQ, or Rigetti. There were only some of the typical partnership announcements, but nothing to cause a stock to shoot up multiples.

In fact, on October 4th, D-Wave received a notice of non-compliance with NYSE (very bad news actually), with its stock trading below $1 – indicating that it was at risk of being delisted.

But by November 4th, it was back above $1 – problem solved.

As an indication of how caught off-guard these companies were, Rigetti announced a $100 million secondary offering at the market on November 25th on its stock run-up, thinking it would take advantage of the higher stock price.

Its stock fell to around $2.25 after the news and then went on a run to over $7. It would have been better to wait and conduct the offering at a much higher price.

This was fast money piling into an “overnight” hype cycle, hoping to pull in a lot of retail investors along the way.

Enterprise value to sales (EV/Sales) multiples of 80, 146, and 177 simply won’t last long. While the growth in quantum computing is exponential now, there is a lot more R&D required before the revenues – and eventually cashflows – start to justify valuations this high.

Fair warning at these levels. If I had to guess, this was a hype-driven run-up by fast money, hoping to goose those year-end bonuses.

Next year will be a great year for the industry, however…

And Google’s latest announcement will definitely drive more investment into the industry, both public and private.

Jeff