The company is backed by Nvidia, as well as Scottish Mortgage Investment Trust, and Softbank. So there’s a lot of smart institutional backing here.

Let’s take a closer look at this under-the-radar $10 stock.

The company at a glance

Recursion is a clinical-stage biotech firm that’s attempting to industrialise drug discovery by using artificial intelligence (AI) and machine learning to decode biology.

In July 2023, Nvidia announced a $50m investment in the firm, initiating a partnership aimed at enhancing Recursion’s AI-powered drug discovery capabilities. With Nvidia’s powerful chips, Recursion has built BioHive-2, the largest supercomputer in the biopharmaceutical industry (and 35th in the world). 

It’s developing a few therapies for cancer and rare diseases, but also aims to generate substantial service fees by allowing other biopharma firms to use its drug development platform. Notably, it has signed deals with industry heavyweights like Bayer, Roche, and Sanofi.

Another encouraging thing here is that Nvidia hasn’t sold any of the Recursion shares it bought even though the AI juggernaut did offload a few of its positions in Q4, including Soundhound AI. This apparent vote of confidence in the firm is what sent the stock up nearly 24% last week.

Recently, the company merged with Oxford-based Exscientia, another leader in the AI drug discovery space. The combined entity now has a portfolio of more than 10 clinical and preclinical programmes, and over 10 partnerships.

Recursion is automating the age-old practice of looking into a microscope and is replacing human interpretation with AI. This is exciting because it provides the opportunity to profitably pursue more minor diseases that may not have been commercially viable using traditional drug development processes.

Scottish Mortgage Investment Trust.

Still early days

As revolutionary as this sounds, the company’s pipeline is still at an early stage. That means it will be at least three-to-five years, at best, before any of these therapies start generating sales.

In the meantime, the company could sign more deals and receive milestone payments for drug development collaborations. However, this is a very speculative stock because consistent sales, let alone profits, aren’t expected for many years.

Following the merger, the firm has over $700m in cash and equivalents. That’s enough to pursue its pipeline for now, but a further fundraise can’t be ruled out at some point. Therefore, the possibility of shareholder dilution is a risk here.

Millionaire-maker?

Nvidia CEO Jensen Huang thinks the next big AI revolution will be in healthcare, which explains the partnership with Recursion. So the stock is definitely worth keeping on the radar.

However, it’s far too early for me to get bullish because the company’s platform isn’t yet churning out AI-discovered treatments.

To turn £10k into £1m, the stock would need to rise 100-fold, assuming constant exchange rates. Currently, Recursion has a $4.1bn market cap, which means it would be valued at around $410bn if it achieved that feat – larger than AstraZeneca today! So highly unlikely then.

As things stand, I’m not going to invest in this risky stock.

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Between them, they own around a 10% stake in this little-known AI innovator. Meanwhile, famed growth investor Cathie Wood of Ark Invest is also a big fan. Indeed, Ark is actually Recursion’s largest shareholder.

Here’s what investors need to know about this $8 stock.

Biology meets AI

Founded in 2013, Recursion uses big data and machine learning to target a faster, cheaper and better approach to discover medicines. The firm says it is “decoding biology to industrialise drug discovery“.

It uses both public and its own 23 petabyte dataset (which is massive) to discover new compounds and viable candidates to treat rare diseases and certain cancers.

Because its AI replaces human interpretation and dramatically lowers costs, this means it can pursue minor diseases that have been overlooked in the past because they weren’t commercially viable.

For example, it currently has five treatments in phase 2 clinical trials. But each of those will treat an initial patient population between 50,000 and 730,000. That’s small.

If successful though, it will be the only firm serving these markets. There are potentially dozens of such diseases where it could have no competition.

It also licences its platform to other drugmakers and has partnerships with industry giants Roche and Bayer.

Basically then, the aim here is to dramatically lower the costs and time associated with failed drug candidates.

Co-founder and CEO Chris Gibson said its “failure is happening in the first six hours or the first six weeks of the first six months, as opposed to happening six years down the road in Phase 2 or Phase 3.”

Nvidia partnership

Nvidia’s visionary CEO Jensen Huang recently said: “Where do I think the next amazing revolution is going to come? There’s no question that digital biology is going to be it.”

Huang says AI will move biology from science to engineering. And when that happens it becomes “exponentially improving, it can compound on the benefits of previous years.”

As part of its Nvidia link-up, Recursion will add more than 500 Nvidia H100 GPUs to its BioHive-1 supercomputer. Once complete, the firm reckons this will be the most powerful supercomputer owned by any biopharma company.

Recursion does up to 2.2m experiments every week. I’d imagine this upgraded BioHive-1 will take that to another level.

Reality check time

Now, I do have a very small position in this stock. But it’s just to get some skin in the game.

Today, the firm’s primarily making money through its collaborative agreements with drugmakers ($44m last year). It’s likely years away from any profits but has a $2bn market-cap. So this is a risky stock, for sure.

Meanwhile, it ended 2023 with $392m in cash. That’s enough for now but more may be needed in the next couple of years. That could cause share price volatility.

Still, when Nvidia, Scottish Mortgage, and Wood all invest in a particular AI stock, it’s worth taking note. It could be a massive long-term winner, or not. So a small holding is all I want.

The post Nvidia and a FTSE 100 fund own a 10% stake in this $8 artificial intelligence (AI) stock appeared first on The Motley Fool UK.

Perhaps that’s not too surprising. These companies are at the forefront of AI, whether through their chips, chatbots, or physical infrastructure. So I do reckon big tech has much further to go.

However, I also think massive AI-powered winners will ultimately be found outside of these dominant firms. And one area where they might emerge is in healthcare, where we’re starting to see breakthroughs enabled by accelerated computing.

Here are two stealthy AI stocks that investors might want to consider.

A powerful platform

The first stock is mRNA pioneer Moderna (NASDAQ: MRNA).

Admittedly, at first glance, this might not look like an AI stock, as it’s synonymous with Covid vaccines. But Moderna is a digital-first biotech company whose scientists write their own mRNA instructions similar to how software is written for a computer program.

On 14 December, the company released incredible news relating to its cancer vaccine candidate. In combination with Merck‘s Keytruda medicine, it reduced after three years the risk of relapse or death by 49% in stage 3/4 melanoma patients.

It also reduced the risk of this deadly skin cancer spreading to other parts of the body by 62%.

The custom-built treatment uses the same technology as the company’s Covid vaccine. So mRNA is used to instruct cells to produce proteins that trigger an immune response to attack specific mutations in cancer cells.

Despite the positive phase 3 trial data, the share price is lower now than it was in October. Why? Well, the firm aims to launch 15 new products within the next five years, but its declining Covid-related sales continue to weigh on earnings.

This makes the stock hard to accurately value, and also a volatile one to own.

Yet I think the market is being short-sighted here and missing the bigger picture. Personalised cancer vaccines could be truly transformational for patients, and it makes me wonder what else this mRNA platform might be applied to.

According to Moderna’s CEO, the cancer vaccine could be available as early as 2025. And the firm is already rapidly expanding to additional tumor types with partner Merck.

Having fallen 80% in a little over two years, I think Moderna shares present an intriguing long-term opportunity. I’m looking to add to my holding in the New Year.

An AI supercomputer

Another stock I’ve been looking at in this space is Recursion Pharmaceuticals (NASDAQ: RXRX). This is a biotech that uses AI for drug discovery through its BioHive-1 supercomputer.

According to Recursion, this is the fastest supercomputer wholly owned and operated by any biopharma company.

Nvidia has just invested $50m in the company and is collaborating with it to train its large foundation models in biology and chemistry. So, with a market cap of only $2bn, it has great long-term growth potential.

However, the firm currently only has five clinical-stage programs, meaning it doesn’t have any recurring revenue yet. So this is definitely a high-risk, high-reward investment.

Nevertheless, it’s one that I’m keeping an eye on in 2024, with a view to picking up some shares.

The post 2 growth stocks I’d buy for the artificial intelligence (AI) revolution in 2024 appeared first on The Motley Fool UK.