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The last time we covered Arqit Quantum (NASDAQ:ARQQ) was when it was still Centricus Acquisition Corp, the SPAC that we invested a small, speculative exposure in. The thesis remains mostly unchanged. Using symmetric keys is secure, given trust can be established between the parties sharing the key, and that this is basically the only tenable solution against quantum computing, which can break any encryption based on mathematics. The commercial value of the product is being backed up by early adopters who are signing up for long-term commitments with Arqit and have mission-critical data needs. Arqit will have gone from pre to post-revenue as of the end of 2021, and we believe that as an end of the world hedge, unlike crypto which could by the way be universally dismantled by quantum computing in a few instants, Arqit fits the bill perfectly.

The whole space of cybersecurity tends to be wholly underinvested. Not until a data breach occurs do most companies ever really think about their cybersecurity needs. Indeed, it's a segment that still has quite the room to grow.

Arqit Quantum

Companies that do understand the importance of cybersecurity are the ones that make up Arqit's already developing pipeline.

Arqit Quantum

The UK government, major Japanese conglomerates, IoT, telco and defense companies all make up the current pipeline. Companies like Babcock (OTCPK:BCKIF) and Northrop Grumman (NYSE:NOC) already have signed agreements with Arqit to both use and collaborate in developing as many use cases for Arqit's courier-like model for symmetric keys. The companies share a common need to protect data communications for mission-critical uses. In particular the defense companies are a vote of confidence for the use-cases and necessity of symmetric key courier infrastructure for data communication.

One of the key selling points of Arqit is also the fact that as opposed to dramatic infrastructure shifts or an arms race of encryption algorithms that might have otherwise been required to defend against the quantum threat, Arqit uses immutable and unbeatable properties of photon transmission in conjunction with encryption algorithms that have been used in the past by banks and governments, with literal couriers transporting them. Arqit is just an outsourced courier-like service that for now uses just the cloud and terrestrial data centers run its platform, but will eventually launch satellites with small, but exceptionally powerful computers that will be able to root keys that will be generated between recipients and senders of data using random numbers and a proprietary protocol. The addressable market is therefore every networked device between which safe transmission of data is desirable, and the system makes symmetric keys, which traditionally required high-levels of interparty trust in exchange for security, a totally trustless system.

The revenue and EBITDA projections, which are based on these recurring revenue contracts with the customers in the pipeline, amount to the following and imply the following multiples on forward earnings.

The Value Lab

While revenues and profits are only getting started in FY 2022, 2023 is when we start to see more meaningful EBITDA. With the addressable market including all interconnected devices where privacy is important, even at the 2025 forecast levels, we are of course still at a very nascent stage for this market.

The quantum threat is still a while away. People are not close to working a quantum computer yet, but the point is that it's inevitable, and if you aren't prepared the moment a quantum computer comes online, perhaps in the hands of a quite hostile government or entity, then it will be an instant before that quantum computer decrypts all your data for whatever purposes they might have had for it. With the core market of mission-critical use-cases already forming a nice revenue base for a recurring model with strong theoretical economics, and the further commercialization possible into the broader addressable market, the current valuation, while already acknowledging the uniqueness and timeliness of the Arqit offer, is probably a long way off from where it could be in the next 10-15 years when all networks are threatened by quantum attacks.

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