These 3 Biotech Stocks Using AI Are Outperforming the Market

Healthcare Sector Struggles as Big Tech Surges

According to Dow Jones Market Data, the healthcare sector has marked its worst performance since 1993 this year. Investors have been drawn to speculative investments like technology stocks, meme stocks, and cryptocurrencies, leaving defensive industries like healthcare behind.

For one, Nvidia, whose chips are essential to creating AI language-generating tools like ChatGPT, has seen its stock skyrocket over the past few weeks. Likewise, other big tech stocks have surged on the back of growing optimism around AI. The S&P 500 is up 18.6% in 2023, while the tech-heavy Nasdaq composite is up 35.7%.

In contrast, the healthcare sector faced challenges in 2023 after performing well last year. Rising demand for elective surgeries has put pressure on large health insurers to control costs, while the decline in sales of Covid-19-related products has impacted revenues. Additionally, new legislation threatens to limit drugmakers’ pricing power in the coming years.

3 Biotech Stocks Outperform Market Using AI

The Nasdaq Biotechnology Index, designed to measure the performance of a set of Nasdaq-listed biotechnology and pharmaceutical companies, has decreased by 2.6% this year. However, the surge of enthusiasm for AI has boosted the shares of some small biotech companies.

One such company, Recursion Pharmaceuticals, has seen its stock triple since May. This biotech upstart uses AI-powered models to identify new experimental drug candidates and recently received a $50 million investment from Nvidia. Recursion also plans to license its models to other drugmakers to aid their drug discovery efforts.

Schrodinger, another company implementing AI into its technology, has seen its stock rise by a remarkable 162% this year. The company develops and sells AI-enhanced software used in the drug development process. In May, Schrodinger projected revenue of $70 million to $90 million in its drug discovery unit for this year, up from $45 million the previous year.

Shares of diagnostic imaging firm RadNet, which utilizes AI to interpret mammograms, have also experienced significant growth, up by 80% this year. RadNet is the US’s leading national provider of freestanding, fixed-site diagnostic imaging services and related information technology solutions.

While these stocks command premium valuations despite inconsistent profits from their AI-related businesses, investors are optimistic about their potential for rapid sales growth. For instance, Recursion trades at 60 times its last 12 months of revenue, while Schrodinger trades at 18 times, significantly higher than the S&P 500’s average of 2.5 times.

Analysts Believe Companies Could Further Benefit From AI

Some Wall Street analysts believe that more gains related to AI are on the horizon. Will Sevush, healthcare equity strategist at Jefferies said in a recent interview with the Wall Street Journal that investors need to take the rally seriously, as small-cap stocks tend to experience significant gains when a popular theme emerges.

Likewise, Justin Simon, portfolio manager at Jasper Capital Management, said he sees potential in AI’s ability to detect serious diseases earlier in the diagnostic process. He specifically mentioned iRhythm Technologies, which utilizes wearable sensors to detect heart arrhythmias, as a potentially disruptive player in the industry.

However, Jared Holz, strategist at Mizuho Securities, is skeptical about the long-term sustainability of the AI rally. He argued that companies use AI as a narrative to attract investor interest rather than generate substantial profits.