Should You Buy Rigetti Computing Stock After Its 2,750% Gain Since 2024? Wall Street Has a Surprising Answer.

Rigetti Computing (NASDAQ: RGTI) is one of the hottest quantum computing companies on Wall Street. Its share price has increased 2,750% since January 2024, meaning an initial investment of $10,000 would now be worth $285,000. And analysts think the stock is currently undervalued.

Among the seven analysts who follow Rigetti, the median target price is $40 per share. That implies 42% upside from the current share price of $28. Even the lowest target price of $35 per share implies 25% upside. However, there is a significant risk to the downside that investors must understand before purchasing the stock.

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Rigetti has a competitive advantage in vertical integration

Rigetti specializes in superconducting quantum computing, a modality where microscopic superconducting circuits are cooled to near absolute zero to create qubits, the basic unit of information in quantum systems. Qubits are analogous to bits in classical computers, but they exhibit unique properties such as superposition and entanglement.

Bits (binary digits) encode information in only two states: 1s and 0s. But qubits can occupy a third state, called superposition, meaning a combination of 1 and 0. Qubits can also be entangled with one another, meaning their states can be inextricably linked regardless of distance. Those properties let quantum computers solve problems that are too complex for classical computers.

Rigetti benefits from vertical integration, meaning the company realizes cost efficiencies by controlling a great deal of its supply chain. Rigetti manufactures quantum processing units (QPUs) and builds the computing infrastructure (hardware and software) required to provide cloud-based quantum services.

Rigetti has another important advantage. The company developed the first multichip QPU, meaning a processor comprising several small quantum chips (i.e., chiplets) that have been linked together. Rigetti believes its multichip architecture gives it an edge in building fault-tolerant quantum systems on a large scale.

Rigetti's quantum computers are probably one or two decades away from widespread adoption

Rigetti believes its quantum computers will eventually solve problems in fields such as finance, materials science, climate simulation, and logistics optimization. However, no company has yet built a fault-tolerant quantum system on a large scale, meaning a system with real-time error correction and enough stable qubits to perform practically useful calculations.

To elaborate, qubits are extremely sensitive to environmental noise, meaning fragile quantum states are easily disrupted by mechanical vibrations, temperature fluctuations, magnetic radiation, or even other qubits. Interactions with environmental noise lead to errors, and quantum computers will not be widely useful until errors can be corrected in real time.

Experts generally believe constructing fault-tolerant quantum computers on a useful scale will require systems with 10,000 to 1 million physical qubits. Achieving that milestone may take one or two decades. For context, Rigetti believes it can develop a 1,000+ qubit system by 2027, at which point, it will still need 10 to 1,000 times more physical qubits to build a quantum computer with widespread utility.

Rigetti stock trades at an absurdly expensive valuation

Rigetti is currently worth $9.3 billion. That figure could be much higher two decades from now, but it will probably be much lower at some point between now and then. I say that because the stock currently trades at 1,080 times sales, an absurdly expensive valuation.

For context, the three most expensive stocks in the S&P 500 trade at an average of 60 times sales. Rigetti is literally 18 times more expensive. No company has ever sustained a price-to-sales ratio above 100 indefinitely, let alone a multiple above 1,000. That suggests Rigetti stock could fall 90% or more at some point in the future.

So, why do the Wall Street analysts following Rigetti see upside in the stock? They are likely attempting to factor momentum into their forecasts. The market loves Rigetti right now, so analysts have awarded the company an absurdly high target price. What is more telling is the very small amount of coverage Rigetti actually receives: 71 analysts follow Nvidia, but only seven analysts follow Rigetti. In other words, most Wall Street institutions do not even think the stock is worth evaluating yet.

Trevor Jennewine has positions in Nvidia. The Motley Fool has positions in and recommends Nvidia. The Motley Fool has a disclosure policy.