Over the past year, technology stocks have received the lion’s share of market attention and performance. Not all stocks in the space are equal, though; investors made it abundantly clear that they are only after those names are exposed to the new trends in artificial intelligence. But even then, investors must drill a bit deeper.
AI has many applications, from data analytics to self-driving car technology. However, due to its sophistication, there is one little niche in the market that investors need to remember. The healthcare industry is ripe for an upgrade, especially drug development efforts. Feeding AI tons of patient data can help correlate and solve significant medical issues today.
Knowing this, Alphabet Inc. (NASDAQ: GOOGL) started using its endless data source for more than just targeting advertisements. When people search for symptoms and conditions on Google, they feed the company’s new medical pursuit with new data without knowing it.
Microsoft Co. (NASDAQ: MSFT) and Recursion Pharmaceuticals Inc. (NASDAQ: RXRX) hopped on the same trend, knowing this could be a multi-billion dollar market.
Google’s Bet is A Big Deal
Because drug development requires vast amounts of data, capital, and endless trials, tech companies have invested heavily in machine learning models.
Google got ahead of the curve when its DeepMind A.I. lab partnered with Isomorphic Labs. What was the result? AlphaFold 3, a model that predicts the structure and interactions of all of life's molecules. Here's why it matters before investors dismiss this statement due to its fancy-looking name.
Scientists typically have over 10 million molecules to build drugs from and over a decillion potential combinations (33 zeroes). If this AI model can predict how a proposed drug could affect the human body, it could save an unimaginable amount of time and effort.
As of 2022, the A.I. drug development industry was measured at roughly $1.1 billion in its infancy. These estimates project a compounded average growth rate (CAGR) of 29.6% from 2023 to 2030, doubling approximately every 2.4 years.
Indeed, it’s a drop in the ocean for Alphabet’s $318 billion in sales last year. However, as the technology is proven and adopted by more institutions worldwide, its size could be a double-digit growth area for the company.
Despite only expecting 14% earnings per share (EPS) growth in the next 12 months, analysts at Susquehanna have slapped a valuation of up to $225 for Alphabet, calling for a 36.5% upside from where the stock trades today.
While Alphabet – being the largest search engine in the world – may be the safest way to play A.I.’s role in biotech, there are other places investors could venture into for more aggressive growth.
Microsoft’s Subtle Strategy Could Pay Off Quicker
Why build something yourself when you can team up with someone who has already had a successful run? That may have been the thought process behind Microsoft’s partnering with companies like Walgreens Boots Alliance Inc. (NASDAQ: WBA), allowing the pharmacy to tap into Azure’s capabilities to make smarter prescriptions and provide powerful patient insights.
Another way that Microsoft has entered the decillion molecules issue, exposing shareholders to this potential growth, is by partnering with the Global Health Drug Discovery Institute (GHDDI). With access to global medical data and research facilities, Microsoft’s technology could seriously accelerate new drug discovery at a larger scale than Google.
Biotech, after all, is still all about business, and business wouldn’t boom without a lucrative research and development (R&D) department.
This is why Microsoft chose to work with 1910 Genetics to build an AI-driven drug discovery platform, significantly boosting pharmaceutical R&D productivity. Microsoft hopes that fatter profits could create a virtuous cycle for society’s greater good.
As of April 2024, analysts at Jefferies Financial Group saw a scenario where Microsoft could reach $550 a share, or 33.3% higher than today’s price. This is nearly double the expected EPS growth rate of 12.2% this year.
Tap Into Recursion’s Explosive Offer
Being a $2.4 billion company has its perks, such as headlines pointing to material changes through partnerships or discoveries, which could boost the stock price in ways investors can only imagine. Taking the past as a guide, Recursion Pharmaceuticals has tended to rally by 100% on various occasions when headlines show progress.
July 2023 is one such example, when the company announced that Nvidia Co. (NASDAQ: NVDA) would invest up to $50 million in the company, accelerating the development of A.I. capabilities for drug development and discovery.
Nvidia is only a tiny part of the $680.6 million in institutional investments made into Recursion Pharmaceuticals in the past 12 months.
Recursion has just finished benchmarking its BioHive-2 supercomputer, and its results could be reflected in the coming quarterly earnings results. This is one reason why analysts at KeyCorp see up to $16 a share targets for the stock, which is a potential 61% rally in the making.
