Is D-Wave Quantum Inc. Stock a Buy in 2025?

Source The Motley Fool

The quantum computing landscape is rapidly evolving as major tech giants pour resources into this transformative technology. D-Wave Quantum Inc. (NYSE: QBTS) has emerged as a standout player in this space, with its share price reflecting tremendous investor optimism over the past year. The stock has surged an eye-catching 992% over the last 12 months, making it one of the best performing stocks of 2024.

This remarkable performance comes as quantum computing gains mainstream attention. Technology heavyweights like Alphabet and Amazon have made significant strides with their respective quantum initiatives, including Alphabet's Willow chip architecture and Amazon's Quantum Embark initiative. The enthusiasm surrounding these developments has created a ripple effect throughout the space, leaving investors wondering if D-Wave represents a viable long-term investment opportunity.

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Armed with this brief background, let's examine D-Wave's core value proposition and risk factors to understand if its shares still represent a compelling buying opportunity early in 2025.

A technological pioneer pushing boundaries

D-Wave has achieved several notable milestones in its pursuit of quantum computing advancement. The company recently completed calibration of its 4,400-qubit Advantage2 processor, which demonstrates remarkable performance gains over its predecessor. The new system solves complex 3D lattice problems 25,000 times faster than the current Advantage processor and delivers five-times-better solutions for high-precision computations.

The company has also secured strategic partnerships across various sectors. Recent collaborations include work with NTT DOCOMO for mobile-network optimization and Japan Tobacco Inc. for drug-discovery applications. These real-world implementations demonstrate the practical potential of D-Wave's quantum solutions.

The company's technological achievements extend beyond hardware developments. D-Wave has introduced industry-first service-level agreements for its Leap quantum cloud service, positioning itself as the only quantum computing company providing formal service-level agreements. This move underscores the company's confidence in its platform reliability.

Growing institutional confidence amid valuation concerns

Major financial institutions have shown increasing interest in D-Wave. Following substantial fourth-quarter 2024 buying activity from major investment funds, the company's institutional ownership has reached 55.4%.This substantial institutional ownership, particularly notable for a pre-profit quantum computing company, suggests strong institutional confidence in D-Wave's long-term potential.

Despite this fairly strong institutional backing, the current valuation presents a significant consideration for potential investors. The stock trades at more than 172 times the projected 2025 revenue. This ultrapremium valuation reflects both market optimism and substantial growth expectations for the quantum computing industry as a whole.

D-Wave's hefty valuation suggests investors should carefully consider their entry strategy. The company's recent completion of a $175 million equity offering provides substantial working capital but also underscores the risk of potential shareholder dilution in the years ahead.

Revenue growth and market penetration strategy

Recent financial results reveal the early-stage nature of D-Wave's business model. The company's core quantum computing service revenue grew 41% year over year in Q3 2024, highlighting the increasing adoption of its platform. However, total revenue declined 27% to $1.9 million due to timing variations in professional services contracts.

This revenue-mix shift aligns with the company's strategic focus on recurring quantum computing services. D-Wave has prioritized expanding its quantum-as-a-service platform, which provides more predictable long-term revenue compared to project-based professional services engagements.

The company's market-expansion efforts target both commercial and government sectors. D-Wave recently secured "awardable" status on the U.S. Department of Defense's Tradewinds buying platform, opening access to significant government-procurement opportunities. The company has also established partnerships with the Chicago Quantum Exchange and regional technology companies to accelerate quantum computing adoption across different markets.

These expansion efforts are grounded in practical applications that demonstrate clear business value. D-Wave's quantum computing solutions have shown measurable benefits in network optimization, reducing infrastructure costs for telecommunications companies. The platform has also accelerated drug-discovery processes through quantum-assisted molecular modeling, proving its utility in pharmaceutical research.

A strategic approach to investing in this nascent tech

Given the stock's significant run-up and rich valuation, investors might consider a more measured approach to building a position. One possible strategy involves selling cash-secured puts at strike prices below the current market value. This approach allows investors to potentially acquire shares at lower prices while earning premium income.

For example, investors could sell out-of-the-money puts with strike prices that align with their desired entry points. If the stock maintains its upward trajectory, the premium income provides a return while investors wait for a better entry opportunity. If the stock declines to the strike price, investors can acquire shares at a more favorable valuation.

This options strategy requires careful position sizing and risk management. Investors should only secure puts with cash they're willing to use for share purchases, ensuring they can take ownership of the stock if it falls to their target price.

The verdict

D-Wave operates in a market with extraordinary potential where a functional quantum computer could revolutionize diverse industries from healthcare to artificial intelligence (AI). Moreover, the company has significantly progressed in developing its platform and secured meaningful partnerships. However, the stock's current valuation demands a thoughtful, position-building approach.

For investors intrigued by quantum computing's long-term potential, D-Wave presents an opportunity to gain exposure to this emerging technology. However, the quantum computing market's high valuation and early-stage nature suggest a disciplined, strategic approach to building a position may be the prudent course of action.

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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. George Budwell has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet and Amazon. The Motley Fool has a disclosure policy.

Disclaimer: For information purposes only. Past performance is not indicative of future results.
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