Analyst says hold off on quantum stock Xanadu to see sustainability of 1Q results

Investors should hold off on buying shares of Nasdaq newcomer Xanadu Quantum Technologies, argues Motley Fool contributor Robert Izquierdo in a new post. The Canadian quantum computing company first needs to prove that its strong first-quarter results represent a trend rather than a one-time event, he writes.

Izquierdo advises investors not to rush into Xanadu shares despite the company’s strong first-quarter results, which showed revenue soaring fourfold year over year to $2.8 million. However, that growth was offset by rising costs, with the company’s operating loss jumping 82% year over year to $23.3 million in the quarter.

The sharp increase in expenses alongside limited sales would have been a “recipe for business collapse” had it not been for Xanadu’s IPO in late March (done through a merger with a SPAC). The transaction helped the company to build a cash reserve of $272.5 million as of the end of the first quarter. Xanadu also has an agreement with hedge fund Yorkville Advisors that gives the fund the option to purchase up to $300 million of Class B shares over a three-year period, Izquierdo noted.

The Motley Fool analyst believes investors should first determine whether Xanadu can grow sales to a level that allows it to offset its costs before committing capital to the stock.

Xanadu’s distinguishing feature is its exclusive focus on photonic quantum computing, according to the company. 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 AI because networked machines offer greater computing power, Izquierdo wrote. At the same time, Izquierdo noted that the quantum computing market remains in its early stages, and any of the competing approaches to building quantum computers could ultimately emerge as the dominant technology. For example, rival IonQ’s primary approach relies on ions, but the company also uses photonics to connect quantum machines. IonQ shares are up 54% year to date.

Since the IPO in March, Xanadu shares have climbed around 90%. The stock is covered by two Wall Street analysts, and both rate it a “buy.” The average target price is $44.00 per share, implying 170% upside versus the stock’s closing price on Friday.