Quantum Security Adoption And Regulation Will Drive Long-Term Upside Potential

Catalysts

About Arqit Quantum

Arqit Quantum develops quantum safe encryption and risk intelligence solutions that help enterprises and governments migrate to post quantum cybersecurity.

What are the underlying business or industry changes driving this perspective?

• Regulatory and government pressure to move critical infrastructure and financial systems to post quantum security is shifting customer behavior from awareness to mandated action, supporting sustained growth in license revenue and professional services.
• Rising urgency around quantum enabled cyber threats, including harvest now decrypt later risks, is making quantum safe encryption a budget priority for CISOs, which should expand Arqit’s addressable market and improve top line growth visibility.
• Broader product coverage via Encryption Intelligence and detect, protect and comply positioning creates an end to end migration pathway, helping increase deal sizes, upsell potential and recurring software revenue, supporting higher gross margins.
• First mover positioning in confidential computing and data sovereignty with Intel and Tier 1 European telecoms ties Arqit’s technology to strategic cloud and network initiatives, which can accelerate contract wins and improve revenue growth and backlog conversion.
• Blueprinted wins in telecom and defense, combined with a growing base of demonstration and test engagements, provide a repeatable sales model that can convert current backlog and pipeline into higher revenue and improved operating leverage over time.

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming Arqit Quantum's revenue will grow by 209.2% annually over the next 3 years.
• Analysts are not forecasting that Arqit Quantum will become profitable in next 3 years. To represent the Analyst Price Target as a Future PE Valuation we will estimate Arqit Quantum's profit margin will increase from -6684.9% to the average US Software industry of 12.4% in 3 years.
• If Arqit Quantum's profit margin were to converge on the industry average, you could expect earnings to reach $1.9 million (and earnings per share of $0.1) by about December 2028, up from $-35.4 million today.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 764.9x on those 2028 earnings, up from -10.6x today. This future PE is greater than the current PE for the US Software industry at 31.5x.
• Analysts expect the number of shares outstanding to grow by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.97%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Despite growing awareness of quantum cybersecurity threats, Arqit is still generating very modest revenue at 530,000 dollars against an operating loss of 38.5 million dollars. If the industry wide migration from awareness to action remains slow or uneven across sectors, the company may fail to scale revenue fast enough to cover its cost base, weighing on earnings and delaying any path to positive net margins.
• Arqit is positioning around emerging themes such as confidential computing and data sovereignty, but these markets are nascent and subject to evolving regulation and standards. If regulatory bodies or large enterprises converge on alternative architectures or competing vendors, Arqit may struggle to win large, long duration contracts, limiting long term revenue growth and margin expansion.
• The business model depends heavily on turning demonstrations, test engagements and a 1.2 million dollar contracted backlog into repeat licenses and ongoing platform usage. If conversion rates from trials to full deployments disappoint or large telecom and defense customers delay rollouts, contracted revenue and cash generation could fall short of expectations, pressuring both top line growth and operating leverage.
• Administrative expenses of 34.7 million dollars and continued operating losses are being funded from a finite cash balance of 36.9 million dollars. If quantum security adoption or high margin software revenue ramps more slowly than management anticipates, Arqit may need additional capital in a weak negotiating position, which could dilute shareholders and prolong negative net margins and earnings.
• The competitive landscape is intensifying as traditional security vendors and new entrants invest in post quantum solutions. While Arqit highlights its patents and symmetric key architecture, large incumbents with deeper customer relationships and integration footprints could capture the bulk of long term spending on quantum safe security, constraining Arqit’s market share, suppressing future revenue growth and limiting margin improvement.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The analysts have a consensus price target of $60.0 for Arqit Quantum based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• In order for you to agree with the analysts, you'd need to believe that by 2028, revenues will be $15.7 million, earnings will come to $1.9 million, and it would be trading on a PE ratio of 764.9x, assuming you use a discount rate of 9.0%.
  
• Given the current share price of $24.0, the analyst price target of $60.0 is 60.0% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.