Rigetti Computing – no quantum leap for overvalued shares

Rigetti Computing (Nasdaq: RGTI) is a company that illustrates both the promise and pitfalls of quantum computing. Over the past decade interest in the field has grown rapidly. The hope is that quantum technology could lead to an exponential increase in the speed with which computers process data.

The need for processing power has grown ever more acute due to the demand created by AI. Some optimists argue that it is matter of when, not if, quantum computing has its “ChatGPT moment”. However, most of the industry is still struggling to turn quantum theory into viable businesses. As a result, shares of companies in the sector have been very volatile.

Rigetti Computing was founded in 2013 and was one of the earliest companies focused solely on quantum computing, going public in 2022. Rigetti argues that it is one of the leading firms in the area, making progress in both speed and accuracy. It claims that its technology has been validated by the fact that it has won several research grants and support from the US government, culminating in a recent $100 million investment. Washington is eager for the US to dominate the technology ahead of other countries, especially China.

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Rigetti Computing has made some costly slip-ups

One problem, however, is that although the technology is constantly improving, the core difficulty of how to ensure accuracy remains. The components inside quantum computers are extremely sensitive to even microscopic environmental disturbances, and they are also more prone to minor errors than their counterparts in regular computers.

These two factors can lead to big mistakes in the incredibly complex calculations that quantum computers are designed for. This will limit the application of the technology, with experts agreeing that having a quantum computer in your phone, or even your desktop, may be decades away.

Rigetti has hitherto struggled to secure any significant commercial revenue and continues to make large losses. This has left it almost completely dependent on government support. Note too that the recent US government investment, although a vote of confidence in the technology, is hardly a free lunch. In return for the money Uncle Sam will become a significant shareholder, with all the restrictions and compromises that entails.

Rigetti Computing also faces intense competition in the race for quantum supremacy. Rivals include other companies dedicated to quantum technology, such as IonQ and D-Wave Quantum. Larger established names, such as IBM, and some of the major tech giants, including Google, are also active in the sector. The tech giants are a significant threat in view of the huge resources at their disposal.

Despite a 60% fall in the stock since the spring, a valuation of 88 times estimated 2027 sales still reflects extreme optimism about the firm's future. The shares are also well below both their 50-day and 200-day moving averages. I would therefore short them at the current share price of $12.98 at £250 per $1. Cover your position if it hits $16.75 giving you a downside of $942.50.

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