Cathie Wood Is Betting on This AI Stock: Is It a Buy?

Artificial intelligence (AI) is changing the way we do business. Companies are racing to implement it in umpteen different ways, knowing that the most successful will reap immense financial benefits. That's why investors are also searching for the most exciting AI stocks, but picking the right one might not be easy.

How about getting some inspiration from famous investors?

Cathie Wood, the CEO of Ark Invest, has several AI stocks in her investment management firm's actively managed ETFs. One of them is Recursion Pharmaceuticals (NASDAQ: RXRX), a company looking to use AI to revolutionize the drug development process. Should investors follow Cathie Wood's lead?

A small part of Ark Invest's holdings

Recursion Pharmaceuticals runs a virtual laboratory that uses an operating system (OS) with an AI-powered algorithm to test (virtually) clinical compounds against human genes to predict the most promising candidates to send to clinical trials. If the company's approach proves successful, it could significantly decrease the time and money drugmakers spend developing their products to send to market.

Considering that a drug's development can exceed $2 billion for up to a decade, there is a market for what Recursion Pharmaceuticals is attempting. Imagine the cost savings it could incur and pass on to patients if it decreases the time to discover a medicine by a factor of 10, as it might be able to do.

Recursion could also license its OS to other drugmakers if it proves successful. Between that and fundamentally changing the way drugmakers operate, Recursion Pharmaceuticals has the potential to deliver outsized returns to its shareholders. Yet, the stock makes a tiny percentage of Ark Invest's combined holdings, less than 0.01% as of this writing. It could be that despite how promising Recursion looks, Cathie Wood and her team think there are even better plays out there.

Or, more likely, Recursion's project still looks speculative, so the famed investor is hedging her bet. After all, the company has no products on the market. It has produced some results, though. The company spends a little over $5 million before sending an investigational new drug application (approval before a drug can start clinical trials) versus the industry average of over $25 million.

Recursion Pharmaceuticals also spends 11 months before identifying lead candidates -- the average for the industry is 30 months. Still, until Recursion's products make it to the market, it will be hard for the company to win over investors.

It depends on your risk tolerance

Recursion Pharmaceuticals went public in 2021. Since then, the company has lost 78% of its value. However, it is entering a critical stretch. Recursion will have several data readouts from phase 1 and 2 clinical trials in the next 18 months. Each positive result could be a small vote of confidence in favor of Recursion's aims. There is no guarantee that things will turn out that way, though, and if the biotech records mostly failures, its shares will sink.

Of note, Recursion's first such data readout came in last month, and it was a success. Its REC-994 hit its safety and tolerability primary endpoint in a phase 2 study in treating symptomatic cerebral cavernous malformation. In another positive note, Recursion has entered into agreements with several pharmaceutical giants: Roche, Sanofi, and Bayer. It's always a good sign when smaller drugmakers enter into such partnerships with larger ones; it's a sign that some of its candidates may look promising.

It also means Recursion is much less likely to run into funding issues or, for that matter, to succumb to unexpected regulatory roadblocks, at least for those programs it is developing with its bigger partners. Even considering this aspect of Recursion'a business, it remains a risky biotech company. Interested investors should proceed with caution. Following Cathie Wood's lead, initiating a small position in the company would be best, potentially increasing it as Recursion Pharmaceuticals proves that its approach works.

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Prosper Junior Bakiny has no position in any of the stocks mentioned. The Motley Fool recommends Roche Holding AG. The Motley Fool has a disclosure policy.