2025 AI capex outlook remains strong, Nvidia, Broadcom top picks- BofA

By Ben Cohen

The entrepreneur looked around a Seattle restaurant for a booth where he could have a private conversation. As the co-founder of Annapurna Labs, a secretive Israeli chip-design startup, Nafea Bshara was used to operating in stealth mode. His business was so allergic to publicity that it barely even had a website.

But he was being especially discreet that night because his clandestine meeting was with an influential executive from one of the world's most valuable companies.

And it would result in one of the most consequential deals in tech history.

Their discussion of chips that began over beer and wine eventually led to Amazon buying the mysterious startup for about $350 million. Ten years later, it has become essential to the success of the whole company.

Amazon has long depended on Amazon Web Services — and Amazon Web Services depends on Annapurna.

The company's entire AI strategy is now built on a foundation of chips designed by Annapurna, which is so crucial that analysts have described this custom silicon as the secret sauce of AWS.

The person who might just have the deepest understanding of Annapurna's value is Amazon's chief executive. Before he succeeded Jeff Bezos, Andy Jassy led the company's giant cloud-computing business and made this deal.

"If and when they go back and tell the story of AWS," Jassy told me in an email, "our acquisition of Annapurna was one of the most important moments."

It looks even more important now that the AI boom has sparked a trillion-dollar arms race with Microsoft and Google also investing gigantic sums of money in powerful chips — the brains of artificial intelligence. All the cloud titans are building their own custom hardware, partly to chip away at their reliance on Nvidia. And no company is spending more than Amazon.

This year, Amazon is planning more than $100 billion of capital expenditures, mostly on the AWS infrastructure required for AI systems. It's even building a colossal supercomputer trained on an "ultracluster" of advanced chips designed by Annapurna. All this homemade silicon is the reason it can offer faster, cheaper and more efficient computing.

Basically, a company once known for books is now increasingly obsessed with chips.

And its strategy today was quietly made possible a decade ago with the prescient acquisition of a company that you've never heard of.

Annapurna was born in 2011 a long way from the research lab in Austin, Texas, where it now designs and tests the next generation of chips. It was founded in Israel by entrepreneurs who had decades of experience in the chip business when they decided to start a company together.

At the time, most people in tech were tantalized by consumer products — phones, tablets and mobile gadgets. Bshara and his Annapurna co-founders were drawn more to infrastructure products — chips, servers and behind-the-scenes hardware. After all, it's hard to build successful consumer products outside America, so Israeli companies tend to focus on this overlooked but lucrative niche of the tech industry. "We're infrastructure people," says Bshara, now an AWS vice president based in Silicon Valley.

And they were in the right place at what turned out to be precisely the right time. As cloud computing exploded over the next decade, so would the demand for those infrastructure products.

They named their startup Annapurna after the treacherous mountain in Nepal they were planning to climb until they became too busy doing something else that would take them into a cloud.

As it happens, Amazon had its own plans that sounded as daunting and crazy as scaling one of the world's most dangerous peaks.

You might think of Amazon as the everything store where you order stuff to arrive at your front door the next day. But these days, it prints money from other parts of the business. In fact, the AWS cloud division accounted for more than half of Amazon's profits last year and crossed $100 billion in revenue, which makes it bigger than some of America's biggest companies.

When Annapurna was founded, Amazon was just beginning to think about developing semiconductors to provide AWS customers with more options and lower prices — and take greater control of its supply chain.

The man pushing innovation down to the silicon level was James Hamilton, an Amazon executive with the title of "distinguished engineer" and a shock of white hair worthy of that designation. He spends his days thinking about the sort of infrastructure the rest of us never think about. "For many people, it probably isn't that interesting," Hamilton told me. "For me, it's fundamentally captivating."

His bosses were intrigued when he wrote a memo for Bezos and Jassy in 2013 arguing it was time for Amazon to design chips.

At the time, a lot of people thought this was completely nuts.

The company might as well have decided to construct data centers out of Pringles.

Jassy knew it would be expensive and extraordinarily challenging. "Building a chip," he says, "is not for the faint of heart." He also knew that Amazon would need a partner to pull it off.

And then Nafea Bshara walked into a bar.

Not long after writing his fateful memo, Hamilton left work one afternoon and went to the Virginia Inn in Seattle's famous Pike Place Market for his meeting with Annapurna's co-founder.

Bshara didn't bring his computer because he figured it would be awkward to present from a laptop in a bar. Instead he visited a nearby UPS store and printed four slides about Annapurna that explained who they were, what they did and how they did it — and why they should do it for AWS.

After working together, even the geekiest AWS employees were so impressed by Annapurna that Jassy soon picked up more than just a bar tab.

He struck a deal in 2015 to buy the whole company.

When a startup gets acquired by a tech giant, it's unusual for most of the team to stick around for a decade. But today, 68% of Annapurna's employees at the time of the acquisition are still there. It's also unusual for the startup's founder to compare his workplace to the happiest place on earth. "We're the Disneyland of computer architecture and silicon innovation," Bshara says.

Hamilton says Annapurna has been such an unusually seamless fit inside Amazon for several reasons, including some that apply outside Amazon.

One was that Annapurna engineers appreciate the importance of speed. "They know that months matter, weeks matter more and days matter even more," Hamilton said. But even as they move fast, they can't afford to break things. "If you make a mistake in software, it could cost you a week or two to fix it," he said. "With hardware, you can lose nine months to a year."

These days, the most exciting product coming out of Annapurna's labs is a chip for training AI models called Trainium.

There will be hundreds of thousands of them in the supercomputer Amazon is delivering to AI startup Anthropic this year, a hulking machine named Project Rainier after the massive peak closer to HQ than the Himalayas.

Some chips in AWS data centers are designed by Annapurna, like Trainium and Graviton, its popular central processor for general-purpose computing. Some are made by other companies, like Intel and chip kingpin Nvidia, whose enviable products handle the vast majority of AI workloads. The idea behind this buffet of chips is to provide a diversity of options at different prices depending on customer needs — something for everybody, just like the Amazon store.

So a lot has changed since the first time Bshara and Hamilton met privately in Seattle.

But they recently met again to discuss Annapurna and Amazon. Except this time, they were in Israel. Jassy was there, too. So was Matt Garman, the CEO of AWS. And they were surrounded by employees who had a reason to celebrate.

It had been exactly 10 years since a deal that turned beer and wine into chips.

Write to Ben Cohen at ben.cohen@wsj.com

Rigetti Computing RGTI is set to report first-quarter 2025 results on May 12.

The Zacks Consensus Estimate for first-quarter revenues is currently pegged at $2.46 million, indicating a decline of 19.34% year over year. 

The consensus mark for earnings is currently pegged at a loss of 5 cents per share, unchanged over the past 30 days. The company reported a loss of 14 cents in the year-ago quarter.

RGTI earnings beat the Zacks Consensus Estimate once in the past four quarters while matching the same on two occasions and missing on one, with a negative average surprise of 11.25% (Find the latest EPS estimates and surprises on Zacks Earnings Calendar.)

Rigetti Computing, Inc. Stock Price and EPS Surprise

Rigetti Computing, Inc. price-eps-surprise | Rigetti Computing, Inc. Quote

Let’s see how things have shaped up prior to this announcement.

Key Factors to Consider for RGTI Q1 Earnings

RGTI’s focus on developing high-fidelity Quantum Processor Units and expanding its market presence through partnerships and new customer acquisitions, particularly in government and international markets, is expected to have driven growth in the to-be-reported quarter.

The ongoing collaboration with Quanta Computer is expected to have driven advancements in Rigetti’s quantum computing technology in the to-be-reported quarter. With both companies investing more than $100 million, this partnership could lead to enhanced development and commercialization of superconducting quantum systems.

The launch of Rigetti’s 84-qubit Ankaa-3 quantum computer, which has improved performance, is likely to have attracted more customers in the to-be-reported quarter. The availability of this system through major cloud platforms, such as Microsoft MSFT Azure and Amazon AMZN Braket, could further expand its reach. The system will allow users to leverage Amazon and Microsoft platforms for quantum computing innovation.

The integration of AI-driven calibration tools is expected to have improved the efficiency and performance of Rigetti’s quantum systems in the quarter to be reported, making them more reliable for customers and potentially attracting more business.

RGTI Shares Underperform Sector, Industry

RGTI shares have plunged 32.5% in the year-to-date period compared with the Zacks Internet - Software industry’s decline of 1.2% and the broader Zacks Computer & Technology sector’s decrease of 9.2%. 

The underperformance can be attributed to increasing macroeconomic challenges and U.S. President Donald Trump’s decision to impose tariffs on top trading partners, including China, Mexico and Canada, which has increased the chances of a trade war.

YTD RGTI Stock Performance

RGTI Stock Trading at a Premium

RGTI stock is not so cheap, as suggested by the Value Score of F.

In terms of the forward 12-month Price/Sales ratio, RGTI is trading at 129.25X, higher than the Computer & Technology sector’s 5.69X.

Price/Sales Ratio (Forward 12 Months)

RGTI’s Benefits From Expanding Clientele

RGTI’s expanding clientele, which includes Amazon, Microsoft, Riverlane, NVIDIA NVDA and Quantum Machines, further underscores its growing influence in the quantum computing space.

Rigetti’s announcement of the successful application of AI, in collaboration with Quantum Machines, to automate the calibration of its 9-qubit Novera QPU has been noteworthy. 

This was achieved by leveraging NVIDIA DGX Quantum, enabling high gate fidelities and marking a significant advancement in quantum computing operations. Benefits from the partnership with NVIDIA and Quantum Machines are likely to have been reflected in the to-be-reported quarter’s performance.

As the quantum computing market continues to evolve, RGTI is poised to benefit from its growth. Per a Grand View Research report, the global quantum computing market was valued at approximately USD 1.42 billion in 2024 and is projected to expand at a compound annual growth rate of 20.5% from 2025 to 2030. This bodes well for RGTI’s prospects.

Rigetti Suffers From Quantum Market Challenges

Rigetti’s advancements in the quantum computing space are continuously benefiting the company’s top-line growth.

However, challenging macroeconomic uncertainties and intense competition in the rapidly evolving and highly competitive quantum computing market are expected to have negatively impacted the company’s top-line growth. These challenges are further compounded by recent remarks from influential industry leaders. 

Meta CEO Mark Zuckerberg and NVIDIA CEO Jensen Huang have both expressed doubts about the near-term practical applications of quantum computing, suggesting it may take decades to become commercially viable. The concerns raised by these high-profile CEOs have contributed to a market downturn affecting Rigetti in the quantum computing industry.

RGTI Shares – Buy, Sell or Hold?

Rigetti’s advancements in quantum processors and modular chip architecture will benefit the company. 

However, stretched valuation, along with stiff competition, is expected to drag down RGTI shares in the near term.

Currently, Rigetti carries a Zacks Rank #3 (Hold), implying that investors should wait for a better entry point to accumulate the stock. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

This article originally published on Zacks Investment Research (zacks.com).

Zacks Investment Research

(Updates with response from Taiwan Semiconductor Manufacturing in the fifth paragraph.)

Tech industry representatives are warning that new US investments pledged by major firms could be put at risk if Congress doesn't fully reinstate a tax deduction for research and development, Bloomberg reported Friday, citing the Information Technology Industry Council.

"A lot of those announcements are predicated on an expectation the administration and Congress will partner together on reinstating those R&D provisions," said Jason Oxman, president of the trade group whose members include Amazon and Apple , according to Bloomberg.

Lobbyists representing tech firms that pledged new investments, such as Amazon, Apple, Oracle , Microsoft , Meta Platforms and Taiwan Semiconductor Manufacturing , have made similar claims to Congress, the report said.

Restoring tax deductions will incentivize investments, Intel vice president for government affairs Al Thompson said, according to Bloomberg.

Taiwan Semiconductor Manufacturing and Microsoft declined to comment when contacted by MT Newswires, while the Information Technology Industry Council, Amazon, Apple, Oracle, Meta Platforms and Intel didn't immediately respond to requests for comment.