Examining the Pure Quantum Plays
D-Wave Quantum Inc (NYSE: QBTS) surged Friday on a massive awareness plan that seemed to be in sympathy with the rise in C3.ai (NYSE: AI) and the explosive user growth of Chat GPT. The question on investors minds is does it have legs and can it be a multi-day runner. D-Wave’s twitter feed showed that in September 2022 they were planning to host an industry conference in Miami from 17 – 19 January 2023 that was to be a catalyst for growth. Given that the company has access to quantum computing is it really a surprise that they didn’t game out this scenario. Leading up to that conference they attended the Quantum World Congress in November and hosted various webinars for prospects to introduce them to the world of quantum computing. They also recruited top speakers like David Pogue and even took out an ad in the Wall Street Journal. Industry players from Johnson & Johnson, Deloitte, and Mastercard ended up being speakers and explaining how quantum computing was helping their respective organization. The next publicity bump came on January, 23 from Time Magazine as they wrote about “The Quantum Leap.” More is on the way which is why the stock is climbing. Even the CEO Alan Baratz is getting into the act, he just joined twitter.
Governmental Fear of Missing Out (FOMO) Building
Investors aren’t the only ones worried about the pace of development in quantum computing. The Wall Street Journal pointed out last year that Baidu (NASDAQ: BIDU) unveiled its own 10 qubits quantum computer. Government agencies and financial institutions are concerned that these quantum computers have the potential to unravel existing encryption which could expose intelligence assets, military secrets, or worse by crashing our banking systems. Although the US government will never admit they are falling behind in this arms race in quantum computing, the Chinese ambitions to build more powerful quantum computers could lead to an explosion in demand by government agencies to keep up with the pace. Atom Computing, one of the leaders in the quantum computing space that developed a 100 qubit prototype, was just awarded a grant from Defense Advanced Research Projects Agency (DARPA) on January 31, 2023. The Japanese seemed to counter with Waseda University Ventures investment in startups Quantum Computer Hardware on February 3.
Right now only Alphabet (NASDAQ: GOOG), IBM (NYSE: IBM), Microsoft (NASDAQ: MSFT), and Amazon (NASDAQ: AMZN) are making quantum computers. Noticeably missing from the list is Intel (NASDAQ: INTC) because they are working on a scalable quantum technology that isn’t there yet, according to The Quantum Insider.
Scarcity of Quantum Companies
IonQ Inc. (NYSE: IONQ) is perhaps the blue chip in the sector with manufacturing and big government military contracts, along with commercial contracts with customers like Airbus, GE, Dow Chemical,and Hyundai Motors. Quantum Computing Inc. (NASDAQ: QUBT) is a full-service quantum solutions provider. They offer time to their customers on their quantum computers. In the end they are about offering quantum technology for real-world business solutions. Rigetti Computing (NASDAQ: RGTI) also has an hourly model that allows for customers to use the computers for their research projects. There aren’t many companies in the space which means these quantum names could move significantly higher with any number of catalysts. The low number of companies to invest in, and high investor demand is a perfect scenario for a squeeze from these beaten down levels.
Financial Analysis / Risks
What investors may not be aware of is that QBTS was a SPAC deal valued at $1.6 billion and IPO’ed on August 8, 2022 at a price of $10. The current market cap is a paltry $175 million. The SPAC was supposed to raise $340 million but the redemption feature of the SPAC backfired as SPAC deals cooled and ended up only netting the company $50 million from the deal after investors redeemed $291 million from the trust account.. This shortfall had the company scrambling, and they signed with Lincoln Park Capital to do up to a $150 million in an Equity Line over the next 36 months. The minimum drawdowns were $30 million. The slow grind lower from $10/share may have been primarily due to the structured seller and the lack of excitement in the sector.
The company had 110 million shares issued and outstanding as of August 2nd but that number expanded by 15 million by September 30, 2022. Their total current assets at the end of the quarter was $26.2 million. Until the 10-K is released it’s just a guess at how many shares were issued to keep the company operating. At worst they are burning $15 million quarterly. From mid October to mid November it looks like they sold $30 million of stock at $5.50 which probably added 5.5 million shares to the O/S. Given the promotional campaign and the $1.00 floor on the equity line it’s reasonable to think another $30 million came into the company and increased the O/S buy 30 million shares.
The company also was QBTS.WT that convert at 1.45 shares at $11.50/share 5 year warrants
QBTS currently has 63 customers that are on the Forbes Global List. These include Deloitte, Master Card, BASF, Siemens, Unisys, Uptown Basel (Quantum Incubator). Their business plan revolves around attracting more clients to onboard their platform. The events and the conferences are working to drive customer engagement. The microclimate is also helping, as the US seems to have gotten itself into a technology war.
“It’s evident companies are embracing Quantum Computing for driving efficiencies for increasing revenue, for reducing costs, and for unlocking business value. We’ve made it easier than ever to access our systems and Technologies.”- Alan BARATX, CEO of D-Wave
IonQ has perhaps the most well-tested product, but they have large customer concentrations subjecting their earnings to volatility. However, the best breed is perhaps QBTS, with a diverse customer base. They have been very good in their webinars in giving use cases that help new customers determine the utility of quantum computers. The downside is the possibility of dilution, but that won’t be seen for a few years. The most significant near-term catalyst is a Google AI event scheduled for February 8, 2020.
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Disclosure: Insider Financial and its owners have NOT been compensated for this article. This article was written by a guest contributor and solely reflects his opinions.