Schrödinger (SDGR -2.61%) stock is going bonkers, gaining 191% this year so far thanks to snappy top-line growth and the hype surrounding artificial intelligence (AI), which it uses in its software platform for discovering leads for biopharma drug development. With no end to the AI hype train in sight, nor any sign of its sales slowing, its shares could easily climb even further, despite its significant cash burn rate.

But should you buy this stock today? There's more to this company than meets the eye, so let's answer that question by looking at its activities more closely. 

What's going on underneath the soaring stock price?

Schrödinger makes money via three avenues: licensing its drug discovery software to third parties, collaborating directly with biopharma businesses to help them develop medicines, and, in theory, by producing new medicines developed in-house. In Q1, it brought in $32.2 million from its software licenses, and $32.6 million from its collaboration partners like Bristol-Myers Squibb.

The idea is that its platform can streamline the drug discovery process by using machine learning to isolate the most promising therapy candidates for further study. And because research and development (R&D) costs soar the more failures that biotechs experience along the path toward forwarding a candidate for clinical trials in humans, the company's software is likely to continue experiencing demand for as long as it's able to deliver real results to subscribers. 

For 2023, management is anticipating that its software segment will grow by as much as 17% year over year. Based on its quarterly revenue rising by 151% over the last three years to reach $64.7 million, the market is probably correct to believe it'll keep growing, thereby warranting a higher price for its shares. And that's before even taking its drug development segment into account.

It doesn't have any medicines on the market yet, and its pipeline only has one clinical stage program: its phase 1 trial for relapsed or treatment-resistant non-Hodgkin's lymphoma. That means it'll take quite a few years before it will even have the chance to make a dollar in revenue from its pipeline. But if it does manage to commercialize a medicine down the line, it'll be a massive catalyst for the stock, and it'll also generate a significant amount of sales. So even if its shares are flying right now, there is a chance (but not a guarantee) that it'll be able to keep advancing in the future.

This stock is shaping up to be an aggressive pick for growth

Schrödinger is doubtlessly a company that's targeting the correct customers with the right tools at the right time, but it's a bit risky for a few reasons. 

First, it burned $127.7 million of its cash in 2022, and it currently has $527.6 million in cash, equivalents, and short-term investments. That means it'll need to become profitable at some point, most likely via its software sales. It also has $115.8 million in debt, which isn't a scary amount, but it means that borrowing additional money would likely be at a higher interest rate than its existing loans.

Then there's its bloated valuation, with a price-to-sales (P/S) multiple of 18.8. If you're hungry for growth, that shouldn't dissuade you, but if you're a more conservative investor or a bargain seeker, it's a dealbreaker. Inflated valuations can sometimes contribute to significant downturns in a stock. 

Most importantly of all, the company hasn't shown that its software platform gives it a genuine competitive advantage in drug discovery, collaboration, or drug development. For now, that doesn't matter much, as it's expanding rapidly. But in the (perhaps distant) future, when there are plenty of other AI-enabled drug discovery services available for biopharmas to work with, it's unclear how Schrödinger's offering will stand out. 

Nonetheless, that's a concern that won't be a major risk factor for at least a few years. And while its shares are pricey, its continued expectations for growth mean that its valuation could easily be justifiable.

Finally, its cash burn rate and debt load won't be enough to bring down the company anytime soon, and investors will have an abundance of warnings along the way before they do.

So, if you're in the market for a growth stock, Schrödinger is a good bet at the moment.