Superconducting Quantum Adoption And Government Hubs Will Drive Long-Term Enterprise Optimization Demand

Catalysts

About D-Wave Quantum

D-Wave Quantum develops and commercializes superconducting quantum computers and hybrid quantum solutions that solve complex optimization and AI problems for enterprise and government customers.

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

• Growing global adoption of quantum optimization for high value logistics, manufacturing and defense workflows, evidenced by production grade deployments such as BASF, Davidson and North Wales Police, should expand recurring QCaaS usage and may support sustained double digit revenue growth.
• Rising enterprise demand to move from single proofs of concept to multi application, multi year arrangements, including emerging enterprise wide license structures, can increase deal sizes and improve revenue visibility while leveraging existing QCaaS capacity to lift margins.
• Accelerating build out of on premises quantum hubs with governments and research centers, such as Jülich, Davidson and the European Q Alliance facility in Italy, positions system sales as a higher ticket complement to cloud revenue and may support long term gross margin expansion.
• Industry wide recognition that superconducting based architectures scale faster and at lower cost than some rival approaches, combined with D-Wave work on Advantage3 and a superconducting gate model program, may strengthen its competitive positioning and support future pricing power and operating leverage.
• Broadening use of quantum and AI for drug discovery, financial services and telecom optimization, combined with more than 100 revenue generating customers and a strong cash position, may create a platform to compound bookings and narrow adjusted net losses over time.

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming D-Wave Quantum's revenue will grow by 71.8% annually over the next 3 years.
• Analysts are not forecasting that D-Wave Quantum will become profitable in next 3 years. To represent the Analyst Price Target as a Future PE Valuation we will estimate D-Wave Quantum's profit margin will increase from -1651.8% to the average US Software industry of 12.4% in 3 years.
• If D-Wave Quantum's profit margin were to converge on the industry average, you could expect earnings to reach $15.2 million (and earnings per share of $0.04) by about December 2028, up from $-398.8 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 1387.0x on those 2028 earnings, up from -22.9x today. This future PE is greater than the current PE for the US Software industry at 32.9x.
• 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 8.45%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• The current surge in revenue is heavily driven by a small number of large, lumpy system sales such as the Jülich Advantage and the EUR 10 million Italy contract. If similar high ticket deals slow or fail to repeat, growth could decelerate sharply and expose how small the underlying recurring QCaaS base remains, putting long term revenue expansion at risk.
• Despite strong gross margins, adjusted EBITDA loss and adjusted net loss are still widening due to rising operating expenses and increased investment in R&D and go to market. If higher spending does not quickly translate into scalable, repeatable deals, the company could remain structurally loss making for longer than expected, pressuring earnings and net margins.
• The company is betting on superconducting technology and its own annealing plus gate model roadmap as the long term winner. Competing quantum architectures or classical algorithms could narrow or eliminate its claimed performance lead, which would erode pricing power and differentiation and ultimately weigh on future revenue growth and profitability.
• Many reference customers are still at the proof of concept or early production stage, and management itself highlights that most QCaaS revenue comes from smaller deal sizes. If enterprises take longer than anticipated to scale to multi application, multi year contracts or revert to classical solutions, expected expansion in recurring revenue and operating leverage may not materialize, limiting earnings improvement.
• The business model increasingly depends on government and defense adoption, including U.S. national security work and European quantum hubs. If policy priorities, budgets or procurement cycles shift away from D-Wave solutions or towards subsidizing rival technologies, anticipated system sales and high margin QCaaS usage could fall short, negatively impacting long term revenue and net margins.

Valuation

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

• The analysts have a consensus price target of $38.55 for D-Wave Quantum based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $48.0, and the most bearish reporting a price target of just $22.54.
  
• In order for you to agree with the analysts, you'd need to believe that by 2028, revenues will be $122.5 million, earnings will come to $15.2 million, and it would be trading on a PE ratio of 1387.0x, assuming you use a discount rate of 8.4%.
  
• Given the current share price of $26.1, the analyst price target of $38.55 is 32.3% 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.