Rigetti Computing

Moat: 2/5

Understandability: 4/5

Balance Sheet Health: 2/5

Rigetti Computing is a quantum computing company, it designs and fabricates quantum processors and develops cloud-based software for high performance quantum computation.

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: Rigetti Computing, Inc. (RGTI) operates in the nascent but rapidly evolving field of quantum computing. They focus on developing and deploying full-stack quantum computing systems, which includes designing and manufacturing their own quantum processors and creating the necessary software and cloud services for accessing and utilizing them. Quantum computing represents a departure from traditional binary computing by using quantum-mechanical phenomena to perform computations.

Revenue Streams RGTI’s revenue streams are primarily from the sale of quantum computing systems, related services, and government funding for research and development. They have seen fluctuations over the years, especially as it is difficult to assess the financial and revenue of the emerging quantum field.

Systems: This includes sales of their quantum computing systems, often integrated in cloud infrastructure or delivered as physical hardware. This line is likely very lumpy as they are both costly and also very early in development.
Services: The revenue from services is tied to helping clients and customers get into quantum systems, including software services and cloud access.
Government Contracts: They also earn revenue through government funding for further development of their quantum technology.

Industry Overview and Trends

The quantum computing industry is still in its infancy, however, it’s gaining significant traction. It is characterized by several notable trends:

Increased Investment: A lot of money is being invested by governments and private players around the world to accelerate research and development in quantum computing
Technological advancements: Rapid advancements in qubit technology, error correction methods, and quantum algorithms are pushing the boundaries of what’s computationally achievable.
Emerging applications: Quantum computing has usecases in a variety of fields, including drug discovery, materials science, financial modeling, and artificial intelligence.
Competition Intensifying: Multiple firms are working on creating viable and competitive quantum systems, leading to intense competition for resources, talent, funding and commercial use.
Cloud access: Many firms are transitioning to cloud based models. Making their technology accessible via cloud.

What Makes Rigetti Different?

Full-stack approach: Rigetti designs and manufactures both the hardware and software, allowing for better optimization of the whole system. This is their key differentiator that distinguishes them from firms that focus on either software or hardware.
Superconducting qubits: RGTI has chosen to use superconducting circuits for the design of their qubits which they claim offers benefits over other approaches.
Emphasis on performance: The company aims to build high-fidelity, scalable, quantum systems. They focus on being able to perform complicated calculations.
Open-source model: Rigetti emphasizes an open system to encourage participation and further development by the community. They believe the broader the community, the quicker the development of technology.

Financials:

Recent Performance: Rigetti’s financial performance remains weak. The company is losing money and continues to burn cash from operations, although some improvement has been seen recently.

Revenue: Revenues have been inconsistent.
Cash: The company has seen its cash reserves decrease.
Operating Expenses: The cost of research and production and other operating expenses is very high.
Net Loss: The company continues to report large net losses due to the very heavy operating and development expenses and still relatively low revenue.
Debt: High amounts of debt to fund operation

In detail:

Revenues: For the three months ended September 30, 2023, Rigetti recognized $2.1 million of revenues, which is a 44% increase over revenue for the same period in the prior year, but it is still quite small. Revenues are not predictable and often fluctuate between quarters and periods.
Cost of Revenue: The cost of revenue was significantly high compared to the revenue at $6.5 million for the three months ended September 30, 2023. Most of the revenue came from research and development agreements with government agencies, implying the service revenue streams are still negligible.
Operating Expenses: Operating expenses amounted to $35.1 million, compared to $37.9 million in the third quarter of 2022, representing some degree of operational and cost efficiency being implemented.
Net Loss: For the three months ended September 30, 2023, net loss was a huge $38.9 million (a loss of $0.12 per share) compared to $37.3 million from the prior year.
Cash: As of September 30, 2023, the company has a total cash of around $146.8 million. The company is burning through cash to develop their technology.
Debt: Rigetti’s Debt is $120 million as of September 30, 2023.

Moat Assessment: Rigetti has some factors that point to it having a future economic moat:

Proprietary Technology: Their proprietary technology can help improve differentiation in their niche.
Specialization: They are focused specifically on quantum systems, making their products and services hard to imitate for firms focused elsewhere.
Economies of Scale: Their focus on building an entire quantum ecosystem gives it a possibility to scale to a certain extend and create competitive barriers.

However, it’s important to note that as of now, it doesn’t have a particularly strong moat because the quantum industry is still in its early stages, and the technology isn’t proven, and there are various other companies that can create similar products and systems. There is no certainty which firm will become the industry leader. So, their moat is categorized as a narrow moat and receives a rating of 2/5.

Risks to the Moat and Business Resilience:

Technological disruption: In an emerging industry, there is a high chance that better technology by competitors will make the company’s technology obsolete.
Uncertain Future: As quantum computing is still very new, there is uncertainty on its adoption, profitability, commercialization and practicality in the long term.
High competition: There are numerous other well-funded players in this market.
High expenses: The development of quantum technology is extremely complex and expensive.
Unproven track record: The company’s track record and profitability has not been well established, and any investment is risky and should be considered speculative.
Heavy Reliance On Gov Contracts: Most of its income is from government agencies and other forms of funding. Failure to secure more of those contracts will severely impact the growth.
Cash Burn: The company is also losing money and burning through cash.

Despite the above risk factors, a few factors point toward good resilience in the business:

Intellectual Capital: The main source of differentiation in this industry is IP and knowledge.
Strong management team: A team that understands the quantum technology and is devoted to furthering its goals.
Established industry relations: The company has several important partnerships in the quantum sector.
First Mover Advantage: They are one of the very few companies operating in this industry and have a head start, provided they capitalize correctly on this opportunity.

Understandability: The core concepts behind the company are quite easy to grasp. They are working on a very new technology. The business operations are also fairly simple. However, the intricate details of quantum technologies and financial statements are hard for non-professionals to analyse and understand. Thus a ranking of 4/5.

Balance Sheet Health: Although it currently holds a good amount of cash, it also is suffering large yearly losses. The company has also taken on a lot of debt to fund their operations. Hence a balance sheet rating of 2/5.