While the biotech industry might not be trumpeting the merits of its use of artificial intelligence (AI) as much as the software industry is, there's still a handful of competitors that use it at the core of their business model. In particular, both Ginkgo Bioworks (NYSE: DNA) and Recursion Pharmaceuticals (NASDAQ: RXRX) are already implementing AI, and in the long term, it could be a crucial factor in their success.
But for now, neither is profitable, and investors might struggle to sort out the AI hype from actual drivers of value. So let's compare and contrast how each company is using AI and determine which is the better AI-enabled biotech to invest in today.
Ginkgo's path to profit is clear
Ginkgo's titular "Bioworks" refers to its biofoundry, wherein clients pay to have the company design, bioengineer, and manufacture economically valuable microorganisms or biological molecules at scale. Each step of that process is streamlined by using powerful genetic design software, machine learning, AI, robotics, and good old-fashioned industrial laboratory automation methods.
The biotech claims that as a result of its streamlining, it'll be able to realize economies of scale in bioengineering and biomanufacturing such that its services will cost customers a fraction of what it would to do all of the above in their own laboratories. And that's how it plans to scale its revenue and its earnings as more biopharmas flock to work with it, making shareholders wealthier along the way.
AI stands to help Ginkgo slash costs pretty much everywhere, though the software-based bioengineering portion of the workflow is where it could make the biggest difference in the near term.
On Aug. 29, it entered into a five-year partnership with Alphabet to build out its AI capabilities, which could deliver efficiency improvements over the next couple of years. Cutting costs is key, as despite increasing its second-quarter biofoundry revenue by 72% compared to a year prior, reaching $44 million, it still reported a loss of $184 million in the period.
In the long term, the case for Ginkgo being the better AI biotech stock rests on being able to deliver on its core promise of profitably delivering bioengineered goods to its customers. Management thinks that its foundry could accommodate up to three times as much demand without needing to spend a lot on hiring more people or expanding its manufacturing capacity.
That's a positive, but until the company demonstrates it can serve any of its biofoundry demand in a way that makes more money than it costs, this is a high-risk stock.
Recursion's story is just beginning
Whereas Ginkgo Bioworks executes on plans that its customers bring to the table, Recursion Pharmaceuticals uses AI and its massive data set of biological information to create high-quality leads for drug development. It also does research and development (R&D) directly, attempting to advance programs of its own. And, in theory, it plans to license its data and drug discovery tools to other biotechs, too.
So the company has three segments, with the success of each resting on the power and breadth of its data universe stocked with 25 petabytes of information. If its data and its highly automated data-processing techniques are as potent as management claims, clients could see their drug development costs fall significantly by working with it.
And with the help of platform collaborators like Nvidia, it's safe to say that Recursion is aiming to make its capabilities into the state of the art. Nonetheless, it'll be a long time before it breaks even or experiences rapid revenue growth. Its trailing-12-month revenue of $50 million is derived solely from its collaborations from pharma and big agriculture partners like Bayer.
It reported a loss of $260 million in that same period, and profitability is nowhere in sight. In fact, investors might need to wait until it commercializes a medicine before it reports growing earnings -- and that could take years, given that its only clinical programs are still in the very early stages.
Neither business has a monopoly on AI in biotech
It's important to keep these two stocks in the appropriate context. Both lost value over the last 12 months, and both are underperforming the market so far this year. It will likely take them at least another couple of years to find their footing and reach profitability, assuming they ever do.
Ginkgo will probably become profitable first, and it's already the faster-growing of the pair, not to mention that its stock is cheaper on the basis of its price-to-sales (P/S) ratio of 10 compared to Recursion's P/S multiple of 31. Those factors support the idea that it is the better AI biotech stock for now. But Recursion's pipeline hasn't had any time to pay off yet, and neither have its licensing and research services segments.
In other words, within a few years, it is fully possible that both companies could be great investments -- or duds. Both are quite risky, and they each have major elements of their business models that still need proving. Assuming you're comfortable with that proposition, it might make sense to buy shares of both.
