In a blog post earlier this year, Bill Gates wrote: "In my lifetime, I've seen two demonstrations of technology that struck me as revolutionary." The first was the graphical user interface (GUI). Gates ended up making billions of dollars from that technology by adapting it into Microsoft's (MSFT 0.50%) Windows operating system.
What was the second revolutionary technology Gates saw? Artificial intelligence (AI). "The development of AI is as fundamental as the creation of the microprocessor, the personal computer, the Internet, and the mobile phone," he wrote.
Microsoft is no doubt Gate's favorite AI stock. There's another one that's arguably his top pick after Microsoft, though -- and Wall Street thinks it could soar by nearly 70% over the next 12 months.
Designing drugs using AI
Schrödinger (SDGR 1.47%) might not match the mental picture that many investors have of an AI stock. It uses AI but in a highly focused way -- to design drugs.
NASDAQ: SDGR
Key Data Points
Designing drugs is complicated, expensive, and time-consuming. It also has a very high failure rate. Schrödinger's software platform helps address these issues.
The company uses both AI and physics to discover novel molecules that have optimal profiles for drug development. Its approach reduces the cost and time involved with drug discovery compared to traditional methods.
These advantages have captured the biopharmaceutical industry's attention. Last year, all of the top 20 biggest biopharma companies based on revenue licensed Schrödinger's solutions.
The Gates connection
Gates didn't just recently stumble across Schrödinger. He personally visited the company's New York office in late 2010. The multibillionaire met with Schrödinger's top scientists and attended a meeting of its scientific advisory board. Earlier that year, Gates told The Wall Street Journal that he had invested $10 million in Schrodinger.
Over the next several years, Gates led other major investments in Schrödinger. In 2019, while Schrodinger was still a privately held company, the Bill and Melinda Gates Foundation Trust co-led a financing round of $85 million.
If you really want to know what Gates' favorite stocks are, look at his charitable foundation's holdings. As he stated earlier this year, "Philanthropy is my full-time job these days."
As of June 30, the Bill and Melinda Gates Foundation Trust owned nearly 7 million shares of Schrödinger -- an 11.1% stake in the company. The only other AI stock owned by the trust is Microsoft.
Wowing Wall Street
Gates isn't the only one who really likes Schrödinger. Cathie Wood's Ark Investment Management is also a major shareholder. Wall Street analysts who cover it are bullish about the stock as well.
The average 12-month price target for Schrödinger reflects an upside potential of 67%. The most optimistic analyst thinks that the stock could skyrocket by more than 135%.
Of the nine analysts who cover Schrödinger who were surveyed by Refinitiv in August, six rated the stock as either a buy or a strong buy. None of the analysts recommended selling the stock.
A few concerns
Is Schrödinger a no-brainer AI stock to buy right now? There are a few concerns that investors should know about.
First, the company's revenue slipped 8.6% year over year in the second quarter. While Schrödinger projects full-year software revenue growth of between 15% and 18%, it slashed its outlook for drug discovery revenue by $20 million at the midpoint of its guidance range. The company said that the lower forecast reflected "new expectations for the timing of collaboration milestones and for the completion of new business development activity."
Second, Schrödinger isn't consistently profitable yet. Although it did post earnings of $4.3 million in Q2, that result was due entirely to a $20.4 million tax benefit.
Third, not every customer appears to be fully on board with Schrödinger's platform. Zai Lab recently threw in the towel on a discovery collaboration with Schrodinger that had been in place for two years.
Still, though, there could be significant long-term opportunities for Schrödinger. Aggressive investors might want to at least keep this AI stock on their radar screens.
