Summary

• We rate Quantum Computing a 'Strong Sell' due to the company's astronomical valuation and dismal financials.

• QUBT's $1.3 billion market cap is largely speculative, and we see significant downside risk as the company struggles to compete with industry giants and other startups.

• Despite raising $190 million, the Company's core business lacks product-market fit, and we don't think the firm has sufficient resources to attract top talent and achieve meaningful progress.

• Shorting the stock appears too risky, but if you're invested, this could be a great chance to get out.

Aviation Disaster

Unless you've been hiding under a rock, it's been hard to ignore the recent red-hot rally we've seen in 'quantum computing' stocks over the last few months.

Kicked off by a few blockbuster reports from computing giants International Business Machines (IBM) and Google (GOOG) that detailed potential advances in the industry, what followed can only be described as a mad dash by investors into any public companies that are even loosely associated with quantum computing.

From mid-November through the end of the year, we saw blistering rallies from quantum-related stocks, including Quantum Computing Inc. (NASDAQ:QUBT), Rigetti Computing (RGTI), Arqit Quantum (ARQQ), D-Wave Quantum (QBTS), and IonQ (IONQ):

QUBT

In our opinion, some of these rallies are probably 'justifiable', to some degree.

For example, IonQ, a (now) $8 billion company, did nearly $40 million in the last twelve months in revenue, and spent nearly $130 million on R&D. The company is producing sales, and—while still loss making—in our mind, fits the profile of a 'challenger'.

That is, it looks to be a company with a singular product vision, a strong management team, and a significant runway. Yes, IONQ appears expensive and risky, but when viewed from the top down, we see green shoots of momentum on the business front.

When looking at Quantum Computing, we don't get the sense the company has a strong chance of producing solid investor returns going forward.

With only 100k(!) in quarterly revenue, a $1.3 billion valuation, and less resources than competitors to attract talent and compete in this 'high-stakes' industry, we think most investors should pass on the stock for the time being, at least until management can show significant progress on productization and execution.

Today, we'll dive into QUBT's business, explore the company's prospects, and explain why we think the company is a 'Strong Sell' for the time being.

Sound good? Let's dive in.

QUBT's Financials

Let's begin with QUBT's financial results, which have been pretty dismal.

In 2018, the company changed its name from 'Innovative Beverage Group Holdings, Inc.', to 'Quantum Computing Inc.', which is the name the company bears today. Certainly, this appears to be an interesting change in business priorities on the part of management.

Since that reorganization, QUBT has begun work on its quantum computing business, which primarily focuses on 9 key products and services, including Dirac-3, the company's 'high-performance quantum machine':

QUBT

In our view, this product lineup is a bit confusing, which reflects the seemingly 'scattershot' approach of management to find product-market fit.

On the recent call, CEO William McGann mentioned that the company was pursuing a foundry approach for thin-film lithium niobate, building early revenues while simultaneously advancing its quantum computing platform:

So in the near-term we're going to leverage the growing demand for TFLN devices in the market to drive early significant revenues for foundry services, while we will in parallel keep on developing along the same path of our own quantum computing machine platform.

At the same time, on the same call, CFO Chris Boehmler mentioned that a material portion of the company's $101,000 in revenue came from a new Johns Hopkins LiDAR project:

The increase in revenues was due to increased contractual sales, primarily from our contract with Johns Hopkins University to deliver an underwater quantum LiDAR prototype.

While we appreciate that the company is attempting to get cash in the door, the apparent differences between the company's stated goals and actual revenue sources make the investing thesis difficult to grasp.

On the cost front, in order to bring in that $101k in sales, the company spent roughly $5.5 million in operating expenses.

Clearly, this is an enormously negative operating margin in percentage terms, but the key point here is that the company's core product lines and stated goals need significant sharpening in order to build an investment case.

QUBT advertises that it's selling access to Dirac-3 via the cloud, but a quick scan of the financials shows that this business hasn't yet generated much in the way of revenue:

QUBT

Similarly, we're waiting on a status update with the TFLN foundry in Arizona.

Production, according to management, is supposed to begin in early 2025, but the facility isn't yet contributing to financials in a meaningful way.

The only real good news for QUBT is that since November, management has successfully raised $190 million by taking advantage of the stock's inflated value on the public markets with equity offerings:

This successful $100 million offering is priced at substantial premiums to our two recent offerings, bringing our total gross capital raised since November to $190 million"

This provides the company with substantial funds to work on building out its revenue sources, but it also increases the pressure. Before the rally, the company was a small outfit with under 50 employees and minimal revenue. Now, with $190 million of fresh investor capital, progress will need to be made, and fast, on the revenue front.

Our main gripe with QUBT is that even with the new funds, the firm seems woefully under-equipped to compete with industry juggernauts like Microsoft (MSFT), Google, and IBM, who have all shown recent updates with their quantum businesses.

Collectively, those three companies have spent more than $450 billion on R&D since QUBT changed its name and got into quantum computing. Obviously, only a portion of that has gone to quantum computing efforts, but it's still several orders of magnitude larger than what QUBT could hope to achieve.

We just don't see how QUBT is going to be able to sustainably incentivize talented researchers to come work for the company, when other, more prestigious and well-funded firms exist.

This dents the long-term value prop for the stock.

The Valuation

So, we're not particularly positive about QUBT's financial situation, even with the fresh funding that staves off runway concerns.

But what is the company worth?

On paper, right now, QUBT is worth roughly $1.3 billion on the open market.

Of the company's assets, which, at this point, probably total close to $266 million, $65 million or so appear to be intangible, which isn't worth anything to the company at this juncture.

Thus, when you subtract out the net debt situation, QUBT's book value is probably worth roughly $185 million.

This leaves 1.12 billion left in value that we can't explain, given the company's financials, which, at this point, are almost completely showing 'burn'.

Being generous, and giving QUBT's 'core business' a $100 million valuation, you still end up with more than $1 billion in value that exists, currently, simply as speculative 'air' in the stock.

We see considerable downside for investors from this point, simply on the back of multiple contractions that could come once the speculative frenzy dies down.

Thus, our 'Strong Sell' rating.

How We're Wrong

There are some ways that we could be wrong about our 'Strong Sell' rating in QUBT.

On the fundamental side, we don't see much in the way of evidence that the company's financials or valuation make a lot of sense. Even with the most incredibly generous valuations for QUBT's human capital and potential with the Dirac-3—call it... 500 million(?)—there would still be significant, significant downside to 'Fair Value' for investors. Plus, you keep all of the execution risk.

We feel confident about our understanding of the fundamentals.

However, there are risks here to our thesis on the 'sentiment' side.

Sure, QUBT is wildly valued by most traditional metrics, but as we heard time and time again when we were on the trading desk in New York, 'dumb gets dumber'.

This saying encapsulates the essence of market frenzy—you can't predict when it may end, and you definitely can't bet against it, for fear of losing your shirt.

Summary

Thus, we come to our conclusion.

In sum, we think QUBT has -80% or more to 'Fair Value', which means that if you're holding on to some shares, if you plan on holding them for any period of time, you should strongly consider selling at this point.

However, betting against a story stock, even at a price like this, is an incredibly risky proposition.

Hence, we're avoiding calling this one a 'short' for the time being—just a 'Strong Sell'.

Stay safe out there.