How Much Higher Can Rigetti Computing's Stock Go?

Quantum computing stocks have been rising at feverish levels this year. One of the hottest has been Rigetti Computing (NASDAQ: RGTI), which, despite some modest financial results thus far, has soared 200% since the beginning of the year and close to 4,800% in 12 months.

Today, its market cap sits at around $15 billion, which is considerably higher than where it was a year ago -- worth a little over $200 million. It has benefited from the artificial intelligence (AI) revolution and the expectation that quantum computers will play a key role in the tech sector's future growth, particularly as AI grows in complexity.

With AI still in its early growth stages, can Rigetti's stock continue to rise even further in value, or is it overdue for a pullback?

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Has Rigetti's valuation become too extreme?

There's lots of excitement around quantum computing these days and the potential for these next-gen machines to revolutionize technology. But the reality is that's still a long timeframe. It could be more than a decade, perhaps two, before quantum computers become mainstream and truly have a big impact on the world.

The problem is that it's hard enough to predict where the leading companies in tech will be in 20 years, let alone small, up-and-coming quantum computing businesses. While Rigetti has shown signs of progress, including the release of its Cepheus-1-36Q machine, which is the largest multi-chip quantum computer thus far, these are still the extremely early innings of a very long game.

The company has generated $7.9 million in sales over the past 12 months, and its net loss over that stretch is $164.8 million. This means investors who buy the stock today are paying a price-to-sales multiple of nearly 2,000 for a piece of the business. Even for large companies, that would be a massive premium to be paying for a stock, let alone an unproven one such as Rigetti.

Analysts also believe the stock has blown past its peak

Analysts who track a stock set a price target for where they think it may go over the next 12 to 18 months. It's by no means a guarantee, but it can be a good gauge for determining how much upside there may be in the near term. In Rigetti's case, the consensus analyst price target is just over $28, which suggests that based on its stock price of $46 as of the end of last week, it has a downside risk of around 40%.

Price targets can vary but even the more bullish ones are at $50, implying limited room for the stock to rise much higher than where it is right now. If positive news comes out to suggest there is considerably more growth potential for Rigetti in the future or that it is making further progress on its machines, then there may be further upgrades leading to more bullishness.

Most investors may be better off passing on Rigetti

I wouldn't be surprised to see Rigetti's stock rise higher in the future given all the excitement around quantum computing this year. But that would be a speculative reason to buy it, and that can add significant risk to your portfolio.

Rigetti's valuation isn't tied to its fundamentals but instead hinges on sky-high expectations for quantum computing in the future. This uncertainty makes it difficult to predict how much higher the stock can go or if in fact it has already hit a peak. And if there's any adversity ahead or even a pullback on AI-related spending, that could spell big trouble for the tech stock.

Unless you have a high risk tolerance, you may be better off avoiding this stock, as Rigetti's valuation is extremely high and leaves no margin of safety.

David Jagielski has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.