Is This Under-the-Radar Artificial Intelligence (AI) Stock a Buy?

This stock’s upside is huge, but so is its downside.

Artificial intelligence (AI) will revolutionize the way many companies do business. It could even fundamentally change entire industries. Picking the corporations driving these changes could pay off massive dividends — literally and figuratively — down the road.

Though plenty of high-profile companies are looking to get in on the act, let’s consider one relatively small and unknown player seeking to make a dent: Recursion Pharmaceuticals (RXRX 1.82%). This mid-cap biotech has big ideas, but are the company’s shares worth buying?

Revolutionizing the drug development process

Developing and marketing novel drugs is a painfully slow process. It is also risky; most therapies tested on humans never earn regulatory approval. Meanwhile, thousands of patients suffer and die while waiting for a medicine that could have eased their pain. Recursion wants to change that. The company uses an AI-powered operating system (OS) to test how millions of clinical compounds would interact with the human body and possibly treat various illnesses.

The goal here isn’t just to speed up the discovery process. The biotech wants to maximize the chances that once it has identified a promising compound thanks to its AI-powered approach, the probability that this new molecular entity will make it past the grueling clinical and regulatory process required to hit the market will be much higher than the average.

If Recursion Pharmaceuticals can pull that off, the company’s expenses will be lower than those of its competitors, and it will launch products faster, allowing it to profit from their patent exclusivity longer. The company will likely also license its AI platform to other drugmakers for a boatload of money. In other words, there are incredibly lucrative possibilities ahead for Recursion Pharmaceuticals.

The company has attracted the attention of some major players in the pharmaceutical industry. It has partnerships with Roche and Bayer to discover and develop therapies in oncology and neuroscience.

It’s a bit too early to bet on this stock

As a rule, clinical-stage biotechs are risky. Recursion may have a big selling point compared to its peers, namely, its AI-powered OS, which could fundamentally change how drugs are developed. But what kinds of results has the company’s approach produced so far? Recursion currently has five programs in phase 2 studies.

The company claims to have more than a dozen candidates in early discovery, but it is impossible to do much with that information for our purposes. Recursion Pharmaceuticals expects several data readouts in the next year for its most advanced candidates. If the company can produce positive data, that will tell us more about its prospects. It’s also worth noting that Recursion’s platform could benefit from the network effect.

Whether clinical trial results are positive or negative, it will help fine-tune its OS to (hopefully) become even more accurate at identifying promising clinical compounds. With that said, Recursion Pharmaceuticals remains a speculative stock, even with its AI-powered OS. There is no guarantee that the biotech’s approach will fulfill its promises. We will only know that once we see a string of positive clinical and regulatory progress.

Thankfully, the company should have enough money to fund its operations, at least for a while, on the back of its partnerships. The next 12 months will be critical for Recursion Pharmaceuticals. It will look like a slightly more attractive stock to buy if it delivers robust phase 2 results and advances at least one candidate to late-stage studies.

Until then, investors should watch things unfold from the sidelines.