Analysts on Wall Street sometimes assign one-year price targets to stocks that imply massive upside potential. That's what's happening with Recursion Pharmaceuticals (RXRX 2.40%), an innovative biotech. The company's shares are currently changing hands for $7.07 apiece, but the consensus one-year target for the stock is $15.57, which implies that it could rise by about 120% over the next 12 months.
If Recursion Pharmaceuticals can pull that off, the company might be worth considering, but is this target too optimistic? Let's find out.
What does Recursion Pharmaceuticals do?
Recursion Pharmaceuticals is a clinical-stage biotech, but it is unlike any of its peers in one crucial way. The company is looking to use artificial intelligence (AI) to accelerate the slow and painful drug discovery and development process. Recursion's operating system is designed to run experiments on a database of human genes to test and predict how clinical compounds would affect and interact with said genes.
This approach has already attracted the attention of some big names. Tech giant Nvidia recently invested $50 million in Recursion, which will allow the latter to build and potentially license AI models trained in the art of drug discovery on Nvidia DGX Cloud to other biotech companies. Recursion is also deepening its collaboration with Nvidia, which will help it build one of the world's top 50 supercomputers.
More recently, Recursion announced a collaboration with Tempus, an AI-focused precision medicine company. Recursion will gain access to Tempus' vast library of data from oncology patients, while the latter will receive annual payments for the next five years that will total up to $160 million.
Lastly, Recursion Pharmaceuticals is doubling down on its partnership with healthcare giant Bayer to discover promising oncology programs. Recursion will be eligible for future payments of up to $1.5 billion in addition to royalties on these programs.
NASDAQ: RXRX
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Are Wall Street's predictions too optimistic?
Despite Recursion Pharmaceuticals' exciting approach to the drug discovery process and the multiple partnerships it has entered or doubled down on this year, the stock has lagged the market since 2023 started. There is a simple reason why. The biotech has yet to show that its approach can lead to the results investors care the most about -- solid, consistent revenue and profitability.
As of now, Recursion generates little revenue and is unprofitable. In the third quarter, the biotech reported a top line of $10.5 million, down from $13.2 million in the year-ago period. And its net loss per share of $0.43 was worse than the loss $0.35 it reported in the prior-year quarter. Although no one expects much more than that from a clinical-stage biotech, there is something else Recursion Pharmaceuticals could do to improve its stock market performance through the next year.
If the company manages to record solid clinical progress, that could send its stock price skyrocketing. Recursion currently has about 10 programs in its pipeline, including three in phase 2 studies. Reporting positive results for its ongoing clinical trials and moving to phase 3 studies would achieve at least two important goals.
First, it would get the company closer to becoming a commercial-stage biotech. Second, it would help validate its innovative approach. Still, with Recursion at a market capitalization of $1.5 billion, it is hard to see its shares soaring by 218% in the next year, even if it manages to record good progress. So, investors shouldn't bet on Wall Street's predictions coming true -- far from it.
Looking beyond 12 months
Even if Recursion Pharmaceuticals doesn't rise by 218% in the next 12 months, that doesn't mean the stock isn't worth buying. Still, the biotech is highly risky. While its approach is promising, it has yet to prove much of anything other than it has a great idea and has convinced several other companies of this fact. That's a great start, but that doesn't amount to a great business yet.
And if Recursion Pharmaceuticals fails to show solid progress, those who invest now could be left with worthless shares somewhere down the line. In short, only investors comfortable with significant risks should consider this company. For everyone else, there are other attractive biotech stocks on the market.
