These 2 Growth Stocks Are Soaring, but Wall Street Expects Downside

Quantum computing firm Rigetti Computing and data center provider Applied Digital have experienced substantial stock surges, 5,950% and 273% respectively over the past year, though analysts predict significant pullbacks for both. Rigetti's rally, partly due to a modest $5.8 million Air Force contract, has led to an extreme valuation of over $15 billion market cap against $7.9 million in trailing revenue, with analysts forecasting a 41% decline. Conversely, Applied Digital's gains are driven by a 15-year, $7 billion revenue-generating deal with CoreWeave, and while analysts anticipate a 57% drop, its valuation is deemed more reasonable given the robust demand for AI data centers and management's credible five-year operating income targets.

Analysis

Rigetti Computing (RGTI) and Applied Digital (APLD) have experienced substantial stock appreciation, with RGTI rocketing 5,950% and APLD soaring 273% over the past year. Despite these significant gains, investment bank analysts express caution, with consensus price targets suggesting substantial pullbacks for both, indicating a mixed market sentiment.

Rigetti Computing's surge is partly attributed to a three-year, $5.8 million contract with the Air Force Research Laboratory. However, this modest contract value pales in comparison to its over $15 billion market capitalization and trailing-12-month revenue of just $7.9 million, resulting in an extreme valuation of approximately 1,450 times sales. Analysts forecast a 41% decline from recent prices, citing this unbridled enthusiasm for quantum computing.

Conversely, Applied Digital's growth is underpinned by a substantial 15-year, $7 billion revenue-generating contract with CoreWeave for data center capacity, a significant increase from its $215 million trailing revenue. While analysts project a 57% decline, the company's valuation appears more reasonable, trading at less than 10 times management's five-year operating income target of $1 billion. The robust demand from AI hyperscalers, expected to invest $350 billion in 2025, provides a strong industry tailwind.

The disparate fundamental drivers and valuations suggest distinct risk-reward profiles. Rigetti faces considerable downside risk due to its speculative valuation and limited current revenue, whereas Applied Digital, despite analyst warnings, presents a more fundamentally supported growth narrative tied to the burgeoning AI infrastructure market.

Key Decisions for Investors

• Investors should exercise extreme caution with Rigetti Computing (RGTI) given its highly speculative valuation of 1,450x trailing sales and analyst consensus predicting a 41% price decline.
• For Applied Digital (APLD), despite analyst short-term price targets, its substantial CoreWeave contract and strong tailwinds from AI data center demand suggest a more fundamentally supported long-term growth trajectory.
• Prudent investors should monitor APLD's execution on its $7 billion CoreWeave contract and progress towards its $1 billion annual operating income goal, alongside broader AI infrastructure spending trends.