D-Wave Quantum: Hidden Opportunity or Short Seller's Dream?

Key Points

• Despite losing about a quarter of its value this year, D-Wave Quantum remains substantially overvalued by some metrics.
• This factor and concerns about the company's marketability, path to profitability, and technological focus have contributed to a highly publicized short seller viewpoint emerging in recent weeks.
• Short interest in the stock has actually diminished slightly, coinciding with the short seller report by Kerrisdale Capital.

D-Wave Quantum Inc. NYSE: QBTS is among the most talked-about firms in a heavily hyped industry. Quantum computing companies, D-Wave plus rivals like Rigetti Computing Inc. NASDAQ: RGTI and legacy computing firm International Business Machines NYSE: IBM, could usher in a new way for humans to interact with and use technology. Successful applications of quantum computers, although few for the time being, suggest a world of computing many orders of magnitude more powerful than any classical computers in existence right now; the global quantum computing industry is expected to grow at an impressive CAGR of more than 20% for the next five years.

And yet, shares of D-Wave have struggled to maintain upward momentum. Though the stock has more than quintupled in value in the last year, it has fallen by about 24% year-to-date (YTD). With the promise of quantum computing and D-Wave's key achievements in the space, wouldn't it be natural for the stock to continue to rise?

The story is more complicated than that. Investors may be cautious about D-Wave because of its sky-high valuation; the firm trades at a price-to-sales ratio of a whopping 262.07. However, there are other reasons D-Wave may be a short seller's prime target, at least in the short-to-medium term.

Annealing vs. Gate-Model

Kerrisdale Capital, a firm known for its high-profile short positions, recently published a report in which it criticized D-Wave for focusing on annealing quantum technology, which seeks to move toward the lowest energy state via quantum fluctuations. Kerrisdale argues that the commercial applications of this form of quantum architecture are minimal. D-Wave, the thinking goes, will fall behind rivals like IBM, building toward so-called gate-model quantum architecture in which sequences of logic gates allow more complex computations beyond optimization.

Kerrisdale goes further, alleging that D-Wave's hybrid solutions rely primarily on classical computing technology and offer little advantage over traditional computers.

Legal Troubles for D-Wave

While it's not uncommon for a short-seller report like Kerrisdale's to cause a company's share price to fall, D-Wave has been grappling with a flood of legal concerns in recent weeks that threaten to send prices further down. The Schall Law Firm, the Portnoy Law Firm, and Block & Leviton have all signaled intent to investigate and potentially litigate against D-Wave for alleged securities fraud related to potential misinformation about its technologies.

Profitability Woes

D-Wave has struggled to achieve and maintain profitability, instead relying heavily on capital raises to continue its operations. The company has achieved a maximum recurring annual revenue of only around $9 million, and revenues in the last year were essentially flat compared to the prior year.

Short sellers may also point to D-Wave's lack of a clear path to profitability in the same breath. Though many investors see D-Wave's technology as promising, there is speculation that it may still be years until the quantum computing industry has progressed far enough to be broadly marketable.

D-Wave's small size compared to massive tech players like IBM and others interested in dedicating increasing attention and resources to developing their quantum systems contributes to the case against it. As technology progresses, a few highly successful firms could quickly dominate the quantum industry. Massive tech titans may have a significant leg up on smaller, specialized competitors like D-Wave.

Short Interest Inches Downward

Despite all of these arguments in favor of shorting D-Wave, looking at the short interest in QBTS shares tells a slightly different story. Investors have shorted about 48 million D-Wave shares, or roughly 17% of the float. However, this figure is down by about 1 million shares from a month prior. Considering that the Kerrisdale report emerged in between, it could be that fewer investors have subscribed to its view than expected.

At the same time, Wall Street analysts remain optimistic about D-Wave in general. All six analysts who have reviewed the company have rated it a Buy, and their consensus price target would have QBTS stock rising close to 16%. Those taking a more bullish view on D-Wave might find, in fact, that the sell-off partially inspired by Kerrisdale provides an excellent opportunity to buy in.