Analyst advised to hold off on buying shares of Quantum Xanadu. What's wrong?

Investors should hold off on investing in newcomer to the Nasdaq - Canadian quantum company Xanadu Quantum Technologies, says Motley Fool freelance analyst Robert Izquierdo. It must first prove that its strong first-quarter 2026 results are a trend and not a one-time phenomenon, he explains.

Motley Fool analyst Robert Izquierdo advised against a rush to invest in Xanadu stock, despite a strong first-quarter 2026 financial report that showed the company's revenue soared fourfold year-over-year to $2.8 million.

However, this growth was offset by higher costs, Izquierdo notes. Operating loss in the first quarter jumped 82% year-on-year to $23.3 million.

Significant cost increases with low sales would have been a "recipe for business failure" if not for the IPO that Xanadu made in late March through a merger with SPAC-company, Izquierdo writes. The deal helped it accumulate $272.5 million in reserves by the end of the first quarter. The company also has an agreement with hedge fund Yorkville Advisors that gives it the option to buy up to $300 million worth of Class B shares over three years, the analyst recalls.

He believes that before investing in Xanadu shares, investors need to understand whether it can grow sales to a level that will offset costs.

What sets Xanadu apart from its competitors is that it specializes exclusively in photonic quantum computing. writes the company itself. Photons are particles of light that can transmit quantum data over long distances. This makes them ideal for networking quantum computers, which is critical for artificial intelligence (AI) because networks have more computing power, Izquierdo writes. However, the analyst writes, the quantum computing market is still in its early stages and any of the approaches to building quantum computers could become mainstream. For example, Xanadu rival IonQ's main approach to building quantum computers is to use ions, but it is also harnessing photons to connect the machines. Since the beginning of the year, IonQ quotes have jumped by 54%.

Since its IPO in March, Xanadu's stock price has soared nearly 90%.

The company's securities have two ratings from Wall Street analysts and all are buy. The average target price is $44, which means the potential upside of 2.7 times the stock's closing price on May 29.