The Next Big Thing: 2 AI-Powered Healthcare Stocks Ready to Explode

Key Points

• The healthcare industry generally takes a more cautious approach to the use of artificial intelligence, but it is happening.

• AI is being used to sift through massive amounts of digital data to provide actionable, straightforward answers.

• Artificial intelligence is proving particularly effective as a means of optimizing drug testing, but also patient usage of drugs.

• 10 stocks we like better than Recursion Pharmaceuticals ›

It's certainly no secret that artificial intelligence (AI) has the potential to change, well, everything for most industries. It's already reshaped several sectors, in fact, and promises to reshape even more in the foreseeable future. That's why so many AI stocks have performed so well for a while now.

Still, there are some industries that seem to remain mostly untouched by artificial intelligence. Take healthcare as an example. Perhaps the industry's corporate guardians are a bit hesitant to turn over something as important as someone's life to technology that still isn't outright guaranteed to do the right thing.

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Now dig deeper. While certainly not as high-profile as OpenAI's ChatGPT or Nvidia's autonomous vehicle tech currently being test-driven by carmakers like Toyota Motor and Rivian Automotive, several healthcare companies are indeed commercializing AI. It's just still early days for this aspect of the business; users are taking things slowly.

This fairly slow pace of adoption isn't a bad thing, though. It means interested investors can still get in near the ground floor.

Here are two promising AI-powered healthcare stocks to consider stepping into before they take off.

Image source: Getty Images.

Recursion Pharmaceuticals

Developing a new drug isn't cheap. Estimates range from hundreds of millions of dollars to over $1 billion apiece, with most of the ones that begin clinical trials never even getting close to an actual approval; most failures are seen in phase 2 (of 3) clinical testing. It's such an expensive waste that some fantastic prospective drugs may forever remain undeveloped, or even tested in pre-clinical trials.

What if, however, there were a way to pre-test the potential of a new drug without actually risking any real time or significant funding in doing so? There is. Recursion Pharmaceuticals (NASDAQ: RXRX) built it.

It's called Recursion OS. Using 36 petabytes (36 million gigabytes) of biological and chemical data, Recursion OS can virtually test how a particular drug idea might perform in a real-world setting at a fraction of the cost of an actual clinical trial.

It's not a replacement for a clinical trial, to be clear. The FDA and other nations' regulatory agencies will still require actual patient testing for any drug. But when the odds of success or failure can be determined in a matter of hours for a pittance rather than found out the hard way -- over the course of years at a cost of hundreds of millions of dollars -- Recursion Pharmaceuticals' platform helps pharmaceutical companies know where to focus, and what to not bother developing.

Its business model is twofold. Recursion is working on some drugs of its own, including a handful of cancer therapies in early-stage testing. It's also working with established outfits like Roche and Sanofi, granting them paid access to Recursion OS in hopes of the co-development of a new drug.

There's no real revenue to speak of yet. The company's top line through the first six months of this year is just under $34 million, versus a net loss of $374 million. These sorts of results, of course, fuel plenty of volatility for the stock, which is further fueled by an unclear and ever-changing future. Just bear in mind there's nothing unusual about sizable or persistent losses for young drug developers.

And for what it's worth, the analyst community thinks Recursion Pharmaceuticals' bright future isn't too far down the road. It expects revenue to triple between now and 2027, halving its losses in the process en route to profitability.

Tempus AI

The other AI-powered healthcare company worth a closer look is Tempus AI (NASDAQ: TEM).

Its tech isn't nearly as eye-popping as Recursion's; Tempus' solutions are far more practical and accessible to caregivers. But this makes them immediately more marketable ... and profitable. The $13 billion company did $693 million worth of business last year, up 30% year over year. While still operationally in the red, most of last year's losses stem from stock-based compensation and employment taxes. If it continues to grow as expected, Tempus AI could outgrow these losses and move into the black as soon as fiscal 2027.

But what is it? It's a little of everything, but it's best described as all-encompassing software that helps caregivers take better care of patients. For instance, it can help diagnose diseases that aren't readily evident, suggest clinical trials that may be of value to a patient who's running out of options, or even predict the efficacy of a particular course of treatment. It's possible to use its platform, however, without even realizing you're utilizing AI.

It's not just for doctors and caregivers, though. Patients also have a portal, as do pharmaceutical companies like the aforementioned Roche and Sanofi.

All of these platforms are designed with the same goal in mind, however. That's improving patient outcomes by streamlining the delivery of a lot of often overwhelming information. This is actually a pretty savvy and common-sense use of artificial intelligence.

Tempus AI is also a stock that interested investors may not want to put on the back burner for too long, waiting to see what happens next.

Although the company's still unprofitable, that's changing quickly. More and more investors know it, too. While this hasn't helped shares make any major net progress since last June's initial public offering (IPO), it certainly seems like the bulls are increasingly testing the waters as the narrative takes on a more bullish tone. The company recently raised its full-year guidance, for example, due to new product launches. Analysts are also gradually raising their price targets, with some of them seemingly waiting for the stock to begin a more consistent bullish performance before making bolder calls. Investors who wait for that dynamic to fully materialize, however, often end up missing out.

Just be aware that -- like Recursion -- the risk and volatility Tempus AI stock brings to the table is above average.

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James Brumley has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Nvidia. The Motley Fool recommends Roche Holding AG. The Motley Fool has a disclosure policy.