Every boom eventually loses steam. There are signs this is already happening with the surge that has lifted many artificial intelligence (AI) stocks this year.
However, don't automatically jump to the conclusion that the joyride is completely over. Here's why Wall Street thinks one AI stock could skyrocket 140% over the next 12 months.
A different kind of AI stock
Most AI stocks fall squarely into the technology sector. That isn't the case for all of them, though. Schrodinger (SDGR -2.61%) is a different kind of AI stock in that it's part of the healthcare sector.
The company has been in business since 1990, long before the current AI wave began. Schrodinger developed a software platform that streamlines the discovery of novel molecules used in drug development.
Historically, the attempts to use software to improve drug discovery have centered on two approaches: machine learning and physics-based methods. The main advantage of the machine learning approach is that it can rapidly process massive data. The disadvantage is that its capabilities are limited by its training data. The main advantage of physics-based methods is that they can predict the properties of new molecules. The key disadvantages to physics-based methods are that they're difficult to develop and slow.
Schrodinger's platform combines the best of both approaches. Its training data used in machine learning models is generated using physics. As a result, the software is fast and can go beyond its training set to identify unique new molecules. Schrodinger is able, therefore, to speed up the drug discovery process, lower costs, and improve the chances that a new molecule enters into clinical testing.
If you think this sounds like something that biopharmaceutical companies would eagerly embrace, you're right. Last year, every single one of the top 20 biggest pharmaceutical companies licensed Schrodinger's software. Schrodinger is also picking up more materials science customers because its approach to discovering new molecules for drug development works great with discovering new molecules for materials applications too.
Wall Street's great expectations
Schrodinger has plenty of fans on Wall Street. Of the nine analysts surveyed by Refinitiv in September who cover the stock, six rated it as a buy or strong buy. The other three recommended holding Schrodinger. None thought that investors should sell.
As previously mentioned, the consensus 12-month price target for Schrodinger is roughly 140% above the current share price. Even the most pessimistic analyst's price target reflects an upside potential of nearly 32%.
Why is there such enthusiasm about Schrodinger? The explosion in investors' interest in AI is undoubtedly one key factor. Schrodinger provides a great picture of how AI is already being used to make a big difference in the important field of drug discovery.
The company is also making progress with its own pipeline. Schrodinger expects to report preliminary data later in 2023 from two phase 1 clinical studies evaluating experimental drug SGR-1505 in treating non-Hodgkins lymphoma. It also plans to kick off a phase 1 study of SGR-2921 in treating acute myeloid leukemia and myelodysplastic syndrome before year-end.
Are analysts right about Schrodinger?
Cathie Wood and Bill Gates appear to be on the same page as Wall Street when it comes to Schrodinger's prospects. Schrodinger ranks as the seventh-largest holding in Wood's Ark Genomic Revolution ETF). The Bill and Melinda Gates Foundation Trust was an early investor in Schrodinger and still owns 11.1% of the company.
But are the analysts right about Schrodinger? I'm not fully convinced.
For one thing, the company's revenue declined nearly 9% year over year in the second quarter of 2023. Although Schrodinger posted positive earnings in Q2 thanks to a tax benefit, it's not consistently profitable yet. It also announced that Zai Lab chose not to move forward with a collaboration the two companies worked on together for two years.
Perhaps Schrodinger's shares will skyrocket 140% over the next 12 months as the consensus Wall Street price target projects. I'd prefer to see more evidence of growth before jumping aboard the bandwagon for this AI stock, though.
