D-Wave Quantum Inc. (NYSE:QBTS) has emerged as a leader in quantum computing, offering a specialized approach for solving real-world optimization problems. These systems are seen as more effective for certain applications compared to GPU-accelerated computing.
The company's latest quarterly result was highlighted by impressive growth and firming margins. On the other hand, the challenge here is that the business is still tiny, with less than $10 million in revenue over the past year. D-Wave isn't currently profitable, and it could be many years before that key metric turns around.
While we see a big opportunity for the company over the long run, there's a lot of work to be done now with too many uncertainties. With shares trading at more than 21x sales, the expectation is for QBTS to remain highly volatile.
QBTS Q1 Earnings Recap
QBTS Q1 EPS of -$0.11 represented a net loss of -$17.3 million. Revenue of $2.47 million was up 56% year over year, but wasn't quite as strong as the consensus estimate closer to $3.0 million.
Favorably, bookings reached $4.5 million, a 43% increase from Q4 and a good indication of the ongoing growth tailwind.
D-Wave Quantum now counts 128 customers, compared to 113 in the prior quarter. Within that amount, 75 commercial customers are up from 69 in Q4. This is important as commercial accounts are seen as higher-value engagements compared to academic institutions or government customers.
The gross margin of 67.3% more than tripled from 26.6% in the first quarter of fiscal 2023. An effort at controlling expenses helped the negative adjusted EBITDA of -$12.9 million narrow from -$16.9 million in the period last year.
A couple of major themes are seen driving the business. D-Wave believes in its latest generation technology with the "Advantage2" system, yielding 4,800+ qubit processors. By this measure, D-Wave has the "World's largest Quantum Computer" that will be accessible to customers via a cloud service.
Several high-profile corporations, including Mastercard (MA), Johnson & Johnson (JNJ), and Lockheed Martin (LMT), are identified as customers. The idea here is that the rush towards AI applications over the past year has raised the profile of what quantum computing can do more effectively for certain tasks compared to GPU-accelerated computers.
This was a point made by CEO Alan Baratz during the earnings conference call:
D-Wave is the first in the world to demonstrate quantum supremacy on real-world problems. This groundbreaking research was achieved using our latest generation Advantage2 quantum computer, showing that our quantum processes can solve problems that cannot be solved classically. And it bears repeating, as there continues to be misinformation in the market, we believe we've achieved a demonstration of quantum supremacy, not quantum advantage or quantum utility, as commonly understood in the community. Our result goes beyond classical computation.
The company is also expected to benefit from the 2024 National Defense Authorization Act (NDAA), which includes provisions for a pilot program for quantum computing near-term applications. Quantum technologies are gaining priority at the Department of Defense, which could add to D-Wave's growth outlook.
In terms of financial guidance, the only target management offers is for the 2024 adjusted EBITDA loss to be "less than the fiscal 2023 Adjusted EBITDA Loss of $54.3 million."
What's Next for D-Wave Quantum?
Getting past all the buzzwords, the sense is that as strong as growth has been over the past year, the market is looking for something more. The reality here is that building quantum computers is expensive and the company will need to continue spending and investing significantly to both push its commercialization strategy and stay ahead of the technological curve.
So while there's a good chance QBTS will generate significant growth over the next several quarters, the question is whether that path is enough to begin approaching sustainable profitability.
According to consensus, revenues are expected to climb from $9.8 million last year to $27.4 million in 2025 and $65 million by 2026. Still, with negative EPS over the period, a recurring cash burn will likely be a lingering issue to pressure the stock over the period.
D-Wave reported a balance sheet cash position of $33 million as of May 10. This includes a $175 million shelf offering filed in April, which essentially gives the option for the company to raise that amount at any time through share sales, effectively diluting current shareholders.
There is also an active equity line of credit allowing D-Wave to borrow up to $83 million as needed on top of $72 million in total debt. Overall, near-term liquidity is not a problem, but it's clear the balance sheet and cash flow are fundamental weaknesses and key risks to consider.
This is in the context of the company's current $221 million market cap against losing $59 million in cash from operations last year. Ultimately, shares face a major headwind to justify even the 16x forward price-to-sales multiple.
Final Thoughts
D-Wave is an interesting stock with a lot of promise, but still too early in its growth journey to be considered an investment. On the upside, we'd like to see a re-acceleration of growth, with evidence that orders and sales are gaining momentum above the baseline of already strong expectations.
The main risk to consider is that a ramp-up of spending and investments adds to the cash burn. Weaker-than-expected results would force the market to reassess the outlook and potentially re-price shares significantly lower. A monitoring point here is the movement in the outstanding share count.
Editor's Note: This article covers one or more microcap stocks. Please be aware of the risks associated with these stocks.
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