Any new buy or sell by charismatic stock picker Cathie Wood draws plenty of headline attention from financial media - and from market participants, as well. The maverick fund manager, known for making outsized bets on “disruptive” tech companies, has garnered her fair share of both followers and critics over the years. However, investors attempting to reproduce Wood's momentum-driven investing strategy needs to get ready for a wild ride; for every breakout stock like Nvidia (NVDA) or Tesla (TSLA), there is a dud like Unity Software (U) or Invita (NVTA).
Notably, Wood's specific investing strategy tends to yield the best returns over the shorter term. Her flagship Ark Innovation ETF (ARKK) is outperforming the Nasdaq Composite ($NASX) on a year-to-date basis - up 50% versus a gain of just over 35% for the broad-based index - but over longer time frames, like the three-year period shown below, ARKK lags the Nasdaq by a considerable margin.
All of that said, let's take a look at the consensus forecast for Wood's newest addition to her flagship fund - an unprofitable biotech stock under $10.
About Recursion Pharmaceuticals
Headquartered in Salt Lake City, Recursion Pharmaceuticals (RXRX) is a clinical-stage biotechnology company that is pioneering the use of machine learning and artificial intelligence (AI) to industrialize drug discovery. The company's platform, Recursion Operating System (ROS), is designed to identify and develop new therapies for a wide range of diseases by analyzing massive datasets of biological and chemical data.
A member of the Russell 2000 Index (RUT), the company's market cap currently stands at about $1.5 billion. Recursion Pharma stock is down more than 10% on a YTD basis, despite a quick 30% rally over the past month.
On Nov. 28, Wood's flagship ARKK fund purchased nearly 1.9 million shares of Recursion Pharmaceuticals for about $12.3 million, just two weeks after a 3.7 million share purchase worth roughly $24 million. Wood's flagship fund now holds just under 6 million shares of the company worth about $41 million, and those RXRX holdings currently account for 0.5% of the ARKK ETF's total weight.
So, is the biotech stock a smart buy right now? Let's take a look.
Is RXRX an AI Stock Pick?
Recursion Pharma may be a biotech stock, but it scored a $50 million investment from Nvidia to fund its AI technology in mid-July - making NVDA a significant stakeholder in RXRX. The partnership is centered on leveraging Nvidia's cloud platform to train Recursion's AI models, primarily for drug discovery support. Notably, a report by market intelligence firm Statista states that AI-enabled drug discovery is expected to expand at a CAGR of 25% through 2030, dominated by the North American market.
Moreover, in its latest quarterly results, the company announced the expansion of its in-house supercomputer BioHive-1. This super-computer, powered by NVIDIA H100 GPUs, will likely make it the most powerful computer wholly owned or operated by any biopharma company in the world. Recursion remains confident that the improved BioHive-1 will be operational in the first half of 2024.
Notably, Recursion also has access to a massive dataset of 100 billion images of human cells extracted by computer vision and machine learning algorithms, thanks to its proprietary Recursion OS platform. Recursion OS integrates diverse technologies that continuously expand one of the world's largest proprietary biological and chemical datasets.
Further, leveraging its AI-enabled dataset, Recursion has developed one of the deepest pipelines of any technology-enabled drug discovery company, with over 40 programs in various stages of development for the treatment of deadly diseases, like brain hemorrhages, rare tumors in the nervous system, and diabetes complications, among others.
Along with Nvidia, Recursion has forged partnerships with well-established names in the biotech and healthcare sector - including its ventures with pharmaceutical giant Bayer AG, Takeda (TAK), and healthcare IT company Tempus.
RXRX Is Still Unprofitable
As a clinical stage biotech company, Recursion's financials are somewhat predictably steeped in red ink. The company has yet to report a profit - and even at that, its latest results for Q3 2023 fell short of estimates on both the top and bottom lines.
Recursion's revenues for the third quarter came in at $10.5 million, down 20.5% from the prior year, and well below the consensus forecast for $12.87 million. Losses expanded by 23% from the year-ago period to $0.43 per share, which again came in wider than the consensus estimate. Looking ahead to fiscal 2024, losses per share are expected to widen 14% on an annual basis to $1.91 per share, based on the average Wall Street forecast.
The company's negative operating cash flows increased to $72.9 million from $54.5 million in the previous year. And through the first nine months of 2023, the cash balance declined significantly to $387.3 million, compared to about $550 million at the beginning of the year. Although that may not be cause for immediate concern due to manageable debt levels, the negative operating cash flow is certainly worth noting.
Another point of concern for potential RXRX investors are the stock's relatively rich valuations, despite the low absolute share price. Recursion stock is trading at a forward EV/sales ratio of 20.6 and forward price/sales of 26.7 - both of which are several orders of magnitude higher than comparable metrics for unprofitable small-cap biotech stocks like Catalyst Pharmaceuticals (CPRX) and BioCryst Pharmaceuticals (BCRX), as well as the healthcare sector median.
Analysts Still Have High Hopes
Just like Cathie Wood, analysts remain optimistic about Recursion stock, which has a consensus “Moderate Buy” rating and a mean target price of $15.29. This denotes an expected upside potential of about 123.2% from current levels. In fact, even the low price target of $9.00 implies expected upside of 30%.
Out of seven analysts covering the stock, two have a “Strong Buy” rating, one has a “Moderate Buy” rating, and four have a “Hold” rating.
