1 Reason to Buy This Beaten-Down Artificial Intelligence (AI) Stock, and 2 Reasons to Sell

Key Points

• Recursion could be on the verge of transforming the drug development process.

• However, the company has yet to demonstrate the superiority of its strategy.

• Moreover, Recursion is going to face growing competition in its niche.

• 10 stocks we like better than Recursion Pharmaceuticals ›

Many investors seek to capitalize on the rapidly growing artificial intelligence (AI) industry. One way to do that is to buy shares of the leading companies in the field, such as Nvidia. However, the chipmaker has been on a tear for the better part of three years, and some might argue it is currently overvalued.

Another way to profit from AI is to invest in lesser-known, beaten-down AI-focused players. This strategy, however, can only work if there are good reasons to believe the company in question can recover.

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With that background, let's look at one AI company that continues to move in the wrong direction: Recursion Pharmaceuticals (NASDAQ: RXRX). The biotech (or techbio) has seen its share price drop by 24% already this year. Is now a good time to buy the stock? Let's consider one argument in favor and two arguments against investing in Recursion Pharmaceuticals.

Image source: Getty Images.

Reason to buy: It could usher in a paradigm shift

AI can help reduce expenses and costs in many areas; why not drug development? That's what Recursion Pharmaceuticals is betting on. The company utilizes an AI-powered algorithm to expedite the initial stages of the process.

Developing novel medicines is expensive, risky, and time-consuming. Most clinical compounds that make it to human clinical trials ultimately fail to reach the market. Despite significant technological progress over the past few decades, the business of drug development has only become more challenging.

By predicting which clinical compounds are the most likely to be safe and effective through an AI-based operating system that tests compounds against a library of human genes, Recursion hopes to increase the probability of success, cut drug development time, increase sales (since they would make it to the market sooner, they would generate revenue for longer periods before dealing with patent cliffs), and increase profits.

If the company's vision becomes a reality, it would transform the entire pharmaceutical industry, and Recursion Pharmaceuticals could become incredibly successful in the process. That's an important reason to consider buying the stock.

Reason to sell no. 1: It has little to show for its efforts

Although Recursion Pharmaceuticals' grand vision looks exciting, the market needs more than just a vision to reward a stock. It needs results. And so far, the biotech company has little to boast about.

Although Recursion promises to transform the way drugs are developed, the company doesn't have a single medicine on the market yet. Worse, it doesn't even have any candidate in late-stage clinical trials.

Of course, that doesn't mean Recursion's approach doesn't work. Perhaps the company will be successful in the future. But in the meantime, the company's lack of tangible proof that it isn't just all talk has been a major reason why its shares have moved in the wrong direction.

Reason to sell no. 2: The competition will be fierce

Recursion Pharmaceuticals isn't the only company working on this project. It has at least a few competitors, some of which recently earned major wins.

For instance, Eli Lilly recently entered into a partnership with privately held Superluminal Medicines, which also uses AI in its approach to making drugs. Eli Lilly and Superluminal will collaborate on using AI to develop weight management therapies in a deal that could be worth up to $1.3 billion for Superluminal.

Recursion Pharmaceuticals has signed similar partnerships, including with Roche, another pharmaceutical leader. Further, Recursion also built the largest supercomputer in the pharmaceutical industry in collaboration with Nvidia.

Perhaps these factors give Recursion an edge in the race to master how to utilize AI in developing therapies, but the lucrative partnerships Lilly (and others) have attracted suggest the race isn't over, not by a long shot. And it's hard to predict who will emerge victorious.

Is Recursion's stock a buy?

Recursion Pharmaceuticals is a risky biotech stock. It boasts significant upside potential if it can execute near-flawlessly and prove that its approach is effective, but it could just as well continue moving in the opposite direction and destroy shareholder value over the next five years. That's why only investors comfortable with significant risk and volatility should consider the stock; even then, ensure it accounts for a small portion of your portfolio.

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Prosper Junior Bakiny has positions in Eli Lilly, Nvidia, and Recursion Pharmaceuticals. The Motley Fool has positions in and recommends Nvidia. The Motley Fool recommends Roche Holding AG. The Motley Fool has a disclosure policy.