1 Beaten-Down AI Stock to Buy and 1 to Avoid

It is increasingly looking like artificial intelligence (AI) isn't just a fad. It is a transformative technology that could introduce paradigm shifts across many sectors and industries. Although some AI companies have already capitalized on the growing interest and massive investments in the industry, we may still be in the early innings of this transformation. In other words, it's still time to invest in AI stocks. But they aren't all created equal. Some look likely to deliver market-beating returns over the long run, while others seem far too risky for all but the most aggressive investors. Let's consider one AI stock in each category.

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A wide-moat AI leader

When ChatGPT first burst onto the scene, some investors thought it would significantly disrupt Alphabet's (NASDAQ: GOOG) (NASDAQ: GOOGL) core search business. The stock fell sharply as a result, but Alphabet ultimately used AI to improve its business, including its famous search engine. The company added an AI mode and AI overviews, boosting search traffic and engagement. Alphabet's financial results remain strong, but the stock is down 13% this year. That's likely because of broader market volatility combined with the company's heavy AI-related investments, which some fear will not yield the results it expects.

However, Alphabet's spending is helping the company establish a strong position and avoid being left behind by its similarly sized peers. Implementing AI across its business -- as it has done, including through AI services it offers to the cloud and via subscriptions for Gemini -- could help boost sales and profits even more. And the company has the option to cut costs, as it did a few years ago, if things don't go quite as planned.

Alphabet may be moving in the wrong direction this year, at least so far, but the company's multiple growth avenues (even beyond AI) and strong competitive advantage thanks to its brand name and switching costs make it a top stock to buy and hold.

Can this company revolutionize the biotech industry?

Recursion Pharmaceuticals (NASDAQ: RXRX) is a biotech focused on accelerating the development of drugs. It normally takes years, sometimes over a decade, for a single brand-new product to go through various phases of clinical trials and earn approval. It also costs a lot. And those are the ones that make it that far. Most stop in the clinic and never earn marketing authorization. Even modest improvements to the time and costs it takes to develop drugs would benefit everyone. Recursion Pharmaceuticals claims it can do that thanks to an AI-powered operating system that tests compounds and sends only the most promising to clinical trials.

That sounds good. Here's the problem: Recursion Pharmaceuticals has yet to launch a single product on the market, and doesn't even have one in phase 3 studies. So, despite the company's ambitious goals, it has yet to prove it can accomplish them. Meanwhile, Recursion Pharmaceuticals, like most clinical-stage biotech, is consistently unprofitable. The stock could deliver strong returns if Recursion makes a breakthrough, but it is very risky right now, and those with average risk tolerance should probably stay away.

Prosper Junior Bakiny has positions in Alphabet and Recursion Pharmaceuticals. The Motley Fool has positions in and recommends Alphabet. The Motley Fool has a disclosure policy.