Is Recursion Pharmaceuticals a Meme Stock?

The concept of a meme stock was born about five years ago. It refers to a publicly traded company that gains substantial market value practically overnight (sometimes literally) due to significant trading activity on online platforms, often driven by interest in online communities. Most meme stocks can be speculative investments, driven by hype rather than fundamentals, and being branded as such is hardly a compliment.

That brings us to Recursion Pharmaceuticals (NASDAQ: RXRX), a biotech company specializing in drug discovery using artificial intelligence (AI). At least one notable name in the investing world thinks Recursion Pharmaceuticals is a meme stock.

Is that the case? Let's look into it and decide whether the company is worth investing in.

Image source: Getty Images.

Jim Cramer speaks

At first glance, it's not clear that Recursion is a meme stock. It has been on a downward spiral for most of the year, and although it has hit patches of volatility, that's well within the norm for clinical-stage biotechs. Interest in the company doesn't seem particularly high on social media, either, at least not enough to drag the stock price in the opposite direction for long enough for it to qualify as a meme stock.

So, why would one think Recursion is a meme stock? The suggestion came from none other than Jim Cramer, the host of the show Mad Money. He isn't just a media figure, though, having made a name for himself as a hedge fund manager. Here is what Cramer had to say in October:

I had Recursion on when they were 9, 10 [dollars per share]. They did an equity offering. The stock got clobbered. It's been down. Now, it's a meme stock, and I can predict, unfortunately, that when it's a meme stock, it's going to go up every day.

His own words gave us a way to test his claims. He said this on Oct. 22. Has Recursion stock gone up every day since? Hardly.

RXRX data by YCharts.

In fact, since then, the stock has underperformed broader equities by some margin. That hardly provides compelling evidence that it's a meme stock.

Is Recursion Pharmaceuticals a buy?

Another sign of a meme stock is that the company's fundamentals seem entirely unrelated to the stock's performance. Most meme stocks had terrible financial or business performances yet saw their shares rise significantly over short periods.

In the case of Recursion, its market performance aligns with what is currently going on with the company.

The company pioneered the use of AI in drug discovery, and it could help revolutionize the way we develop medicine, a process that is currently slow, risky, and expensive. Most compounds that start human clinical trials never make it to the market. Many that do get that far generate disappointing sales that hardly justify the investment that went into them.

By using AI-based models to predict which compounds are most promising, Recursion hopes to significantly increase the likelihood that new candidates will pass all stages of clinical development with flying colors and land on the market, while cutting the time and money required to develop them. And the biotech has partnered with Nvidia to build the largest supercomputer in the pharmaceutical industry.

Lastly, it has several exciting candidates in early-stage studies and has partnered with pharmaceutical leaders like Roche, Bayer, Merck, and Sanofi to develop medicines using its AI-based platform. Despite these positive developments, the stock remains risky, which is why shares are rightly moving down.

Other companies are hot on Recursion's tail. Most notably, Eli Lilly recently said it would build the industry's most powerful supercomputer, also in partnership with Nvidia.

The company could be left in the dust since Eli Lilly's supercomputer will have more computing power and be trained on the vast amount of data available to the much larger drugmaker. Second, Recursion Pharmaceuticals has no products on the market and no candidates in late-stage studies. These two factors alone make the company's prospects bleak. The biotech could soar, however, if it can pull off its master plan.

But it is a speculative, unprofitable company for now, and in the current shaky economy, that's not exactly what most investors want. So, is Recursion Pharmaceuticals a meme stock? Probably not. Is it worth investing in right now for most? Probably not.

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