Quantum Optimization Adoption Will Face Setbacks Yet Ultimately Support A Stable Long Term Outlook

Catalysts

About D-Wave Quantum

D-Wave Quantum provides commercial quantum computing systems and cloud access focused on solving complex optimization problems for government, industrial and enterprise customers.

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

• Although D-Wave now has over 100 revenue generating customers, including around two dozen large global enterprises, many current QCaaS contracts are still relatively small. As a result, any slowdown in converting proofs of concept into multi application or enterprise wide deployments could limit revenue growth and delay operating leverage in the subscription model.
• Although quantum optimization and Quantum AI interest in areas like drug discovery and manufacturing is expanding, customers may take longer to move beyond pilots at BASF, Japan Tobacco and others. This could temper growth in professional services revenue and slow the ramp in higher margin, production use cases.
• Although the company is engaging more with governments, including the U.S. Department of Defense through Davidson Technologies and the Q-Alliance initiative in Italy, delays in government adoption or security accreditation could push out the timing of QCaaS usage and system sales revenue tied to defense and national security workloads.
• Although superconducting technology and the Advantage2 and planned Advantage3 roadmaps target much larger, more complex real world problems, any technical or timing setbacks in scaling to higher qubit counts and multi chip architectures could raise R&D spend without a matching uplift in system sales or QCaaS revenue.
• Although D-Wave is investing to advance its fluxonium based gate model program and reuse superconducting know how across both architectures, the long multiyear path to error corrected gate systems may require sustained R&D and capital. This could weigh on adjusted EBITDA and net loss before the gate model line contributes meaningful earnings.

Assumptions

This narrative explores a more pessimistic perspective on D-Wave Quantum compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts. How have these above catalysts been quantified?

• The bearish analysts are assuming D-Wave Quantum's revenue will grow by 61.8% annually over the next 3 years.
• The bearish 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 12.7% in 3 years.
• If D-Wave Quantum's profit margin were to converge on the industry average, you could expect earnings to reach $13.1 million (and earnings per share of $0.03) by about January 2029, up from $-398.8 million today.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 1104.4x on those 2029 earnings, up from -23.7x today. This future PE is greater than the current PE for the US Software industry at 30.9x.
• The bearish 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 8.44%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• The company reports more than 100 revenue generating customers, a growing mix of large enterprises and a deal structure that includes system sales, QCaaS and professional services. If this broadening customer base and larger average deal sizes keep scaling, revenue and earnings could expand faster than you expect, which could support a higher share price over time.
• D-Wave now has multiple production systems online, over US$100 million in annual QCaaS capacity and is talking about bundled, multi application enterprise style agreements. If usage ramps into that available capacity and customers shift from proofs of concept into wider production, recurring revenue and gross profit could grow ahead of your expectations and push margins higher.
• The company reports system sales to Jülich, a €10 million Q-Alliance contract in Italy, on premises deployments with Davidson Technologies and a pipeline that management describes as strong with larger opportunities. If this model of regional hubs and system purchases spreads to more governments and corporates, system revenue and overall earnings could surprise to the upside.
• Management highlights an annealing roadmap toward Advantage3 and multi chip processors targeting 100,000 qubits, together with progress on a superconducting fluxonium based gate model program and unique cryogenic control. If these technical programs hold or accelerate and attract more real world applications, long term revenue potential and profit margins could look stronger than the flat share price you expect.
• The company reports increasing engagement with the U.S. government, including an operational Advantage2 system at Davidson supporting defense workloads and a stated goal of being certified for classified applications. If this leads to higher value, long duration contracts or broader adoption across national security agencies, that additional revenue visibility and potential operating leverage could support a higher valuation and stronger earnings profile than you are assuming.

Valuation

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

• The assumed bearish price target for D-Wave Quantum is $26.35, which represents up to two standard deviations below the consensus price target of $38.97. This valuation is based on what can be assumed as the expectations of D-Wave Quantum's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• 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 more bearish analyst cohort, you'd need to believe that by 2029, revenues will be $102.4 million, earnings will come to $13.1 million, and it would be trading on a PE ratio of 1104.4x, assuming you use a discount rate of 8.4%.
  
• Given the current share price of $27.04, the analyst price target of $26.35 is 2.6% lower. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• 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.