D-Wave Quantum Inc.

Moat: 1/5

Understandability: 4/5

Balance Sheet Health: 2/5

A quantum computing systems and services provider offering real-time access to quantum computers, application development tools, and expert support.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview

D-Wave Quantum Inc. operates in the highly nascent quantum computing industry. The company develops, installs, and supports quantum computing systems, offering both on-premise and cloud-based access to its technology. Their core products and services include:

  • Quantum Computing Systems: The company’s flagship product is its quantum annealer, a type of quantum computer designed for solving optimization problems. These systems are targeted toward enterprises and research institutions.
  • Quantum Cloud Services (Leap): Provides cloud-based access to D-Wave’s quantum computers, along with a suite of development tools and resources for building and running quantum applications.
  • Professional Services: Offers expert consulting, application development, and technical support services to help customers integrate quantum computing into their workflows.
  • Quantum Software and Tools: Develops and provides software and tools designed to facilitate the development and deployment of quantum applications.

D-Wave stands out from other quantum computing companies by focusing on quantum annealing, a specific type of quantum computation, rather than universal quantum computing which many of its competitors are focusing on.

The company’s customers include organizations in various sectors, including:

  • Defense and Government: Lockheed Martin, NASA
  • Automotive: Volkswagen
  • Technology: Google (collaboration)
  • Research and Academia: Various universities and research institutions

Revenue Distribution

The Company started to generate revenue from commercial application of their quantum technology to customers only recently and as of Q3 2023 was as follows:

  • Customer Collaboration Contracts,
  • Professional services,
  • Government contracts, and
  • Research projects.

As D-Wave continues to develop and mature its business, it will become easier to pinpoint the core demographics for where their business is centered.

The quantum computing market is experiencing rapid growth and is projected to continue expanding in the coming years. According to various market research reports:

  • The global quantum computing market was valued at $560.2 million in 2022, and is projected to reach $3,679.5 million by 2032, growing at a CAGR of 20.7% from 2023 to 2032.
  • The market is driven by increasing investments in quantum computing research and development, growing demand for high-performance computing, and the increasing need for secure data transmission.

These numbers highlight the nascent stage of the industry, along with the potential, but also the high level of uncertainty associated with it.

However, there are also significant challenges:

  • Technological Maturity: Quantum computing technology is still in its early stages of development, and it is not yet clear which quantum computing approach (quantum annealing, superconducting qubits, trapped ions, etc.) will ultimately prevail.
  • High Cost: Quantum computing systems are extremely expensive to develop, purchase, and operate, which limits their accessibility.
  • Talent Shortage: There is a shortage of skilled quantum computing experts, which poses a challenge for organizations looking to adopt the technology.
  • Limited Practical Applications: While quantum computers have the potential to solve complex problems, the number of real-world applications that have been demonstrated is still limited.

Competitive Landscape

The quantum computing landscape is highly competitive and rapidly evolving. Major players include:

  • IBM: Developing universal quantum computers based on superconducting qubits.
  • Google: Also focused on superconducting qubits, with demonstrated quantum supremacy.
  • Microsoft: Pursuing a full-stack approach to quantum computing, with both hardware and software development.
  • Rigetti Computing: Building superconducting qubit-based quantum computers.
  • IonQ: Developing quantum computers based on trapped ions.
  • Other Players: Alpine Quantum Technologies, ColdQuanta, PsiQuantum

D-Wave differentiates itself through its focus on quantum annealing, which it claims is well-suited for solving certain types of optimization problems. However, quantum annealing is not as versatile as universal quantum computing, which is pursued by the majority of its competition and has led to significant criticisms of the effectiveness and real-world applications of the technology.

Given the rapidly-changing nature of the quantum computing field, D-Wave faces a significant risk of technological obsolescence if their quantum annealing approach is ultimately surpassed by other quantum computing technologies, especially if quantum supremacy in the universal computing is achieved in the coming years.

What Makes the Company Different

  • Focus on Quantum Annealing: D-Wave’s quantum computers are based on quantum annealing, making them specialized for particular optimization problems.
  • Commercial Availability: D-Wave was one of the first companies to offer commercially available quantum computing systems.
  • Cloud-Based Access: The Leap quantum cloud service offers easy access to D-Wave’s quantum computers and development tools.
  • Customer Focus: D-Wave emphasizes working closely with customers to identify and develop quantum computing applications.

Financials

Here’s a detailed explanation of D-Wave’s financial health, drawing from its latest reports and earnings calls.

  • Revenue: D-Wave has been experiencing increasing revenues but is still quite minimal.
  • Gross Margins: Gross margins have been quite variable. This could be seen as related to long revenue development cycles of working with commercial customers.
  • Operating Expenses: Operating expenses have been elevated in recent years, largely driven by research and development costs and sales and marketing. This is typical for a company in a nascent sector that requires ongoing innovation.
  • Profitability:
    • The company has seen very small profits in some quarters, but is generally unprofitable and has a net deficit.
    • High levels of debt have been contributing to interest expenses.
  • Cash Flow: D-Wave has negative free cash flow, meaning it is burning more cash than it generates from operations.
  • Liquidity: Based on their latest report they seem to have reduced their debt, their liquidity levels have increased and they are not looking for new avenues to raise capital
  • Balance Sheet: Cash and cash equivalents are at lower levels than historical averages and the company has a negative equity position.

The latest earnings report shows they’re relying on government grants, which are nice to have but can disappear at any moment. Also, the company has stated that it will need to raise further cash, in order to execute on their stated goals in both hardware and software.

Moat

Moat Rating: 1 / 5 (Very Weak)

  • Proprietary Technology: D-Wave’s focus on quantum annealing gives them a specialized technology.
    • However, since the majority of the sector is focused on universal quantum computing this is offset heavily.
  • First-Mover Advantage: As one of the first companies in the field, D-Wave has a first-mover advantage and a list of enterprise-level customers.
    • However, it’s still early days for quantum computing and first mover advantage hasn’t proven its advantage in the sector and is offset by their disadvantage of focusing solely on quantum annealing.
  • Switching costs/Data network effects: Some quantum algorithms need to be built and there are potential lock-in effects for them.
    • These seem very nascent and underdeveloped
  • Scale: As quantum computers improve, there is an advantage in running large scale quantum problems with a quantum solution instead of a traditional computer.
    • Again, it’s too early to say that having that capability provides an advantage since most real world quantum problems can’t be run on it yet.

Legitimate Risks That Could Harm the Moat and Business Resilience:

  • Technological Disruption: Quantum computing is a rapidly evolving field, and breakthroughs in other quantum computing technologies could render D-Wave’s quantum annealing approach obsolete.
  • Competition: Larger, well-funded companies like IBM, Google, and Microsoft are investing heavily in quantum computing and could surpass D-Wave in terms of technology and market share.
  • Limited Applications: The lack of proven real-world applications for quantum annealing could limit D-Wave’s growth potential.
  • Financial Constraints: As a relatively small company with negative equity and negative cash flow and requiring further funding raises concerns about its ability to compete and invest in its business.
  • Customer Adoption: Wider adoption of the technology would lead to economies of scale to become very strong.
    • However if D-Wave’s competitors are more suited towards solving real world problems this makes them unattractive.

Understandability

Understandability Rating: 4 / 5 (Relatively Easy to Understand)

The business model itself is straightforward: offer access to a new technology that solves specific problems. However, Quantum computing is an extremely esoteric field and it’s hard to know how it will play out in real-world applications. D-Wave’s specific focus on quantum annealing and the advantages/disadvantages it offers versus other quantum computing approaches can also be hard to understand.

Balance Sheet Health

Balance Sheet Health: 2 / 5 (Unhealthy)

  • The debt has been recently decreased.
  • Cash is at lower levels than historical averages.
  • The company has a significant accumulated deficit and negative equity

Recent Concerns/Controversies and Management Outlook

The latest earnings calls and reports highlight the following points:

  • A need for ongoing R&D investment to stay competitive, requiring them to “explore” and raise funds for their innovation and business operations.
  • Continued focus on securing customer contracts and demonstrating real-world applications to scale.
  • Reliance on government funding and customer contracts as key revenue sources.
  • Continued belief in the long-term potential of quantum annealing for specific problem sets.