Investing

1 Growth Stock That Could Dominate AI's Next Breakthrough

Eric Bleeker

Published: June 1, 2024 1:08 pm

This discussion explores secondary opportunities to benefit from the AI boom beyond the most talked about stocks like NVIDIA (NASDAQ: NVDA), Intel (NASDAQ: INTC), or AMD (NASDAQ: AMD). The focus shifts to the healthcare sector, highlighting AI’s potential in accelerating drug and protein discovery. Discover why Schrodinger (NASDAQ: SDGR), a small drug discovery building foundational software for drug discovery, is a high-risk, high-reward investment.

Why Schrödinger Is an AI Stock That Should Be on Your Radar

Highlights from analysis from 24/7 Wall Street Analysts Eric Bleeker and Austin Smith can be found below.

• So far, most of the gains in AI are accruing to technology companies. 
• The rise of generative AI has mostly boosted the share price of semiconductor companies like NVIDIA, cloud computing companies, and server companies. All these companies have seen sales and profits accelerate across the past 12 months. 
• The actual companies using generative AI are often companies like banks, and it’s been generating efficiency for their businesses more than a specific product they’re selling.
• Yet, we believe there are some industries where AI will be less of an “efficiency” play in the years to come and drive really incredible breakthroughs.
• The first is robotics. Obviously, the big name in this space is Tesla. Elon Musk has said he believes their robot Optimus will eventually be more valuable than the company’s car business. Beyond Tesla there’s a lot of activity happening in this space and the potential for robots to make significant advancements thanks to AI is very real.  
• Another area to watch is drug discovery. 
• Biotech companies are currently huge buyers of NVIDIA’s gear, for example. 
• Now, we need to take a step back to look at how the foundational software companies in industries that AI impacts have been extremely attractive investments.
• For example, while NVIDIA sells a hardware product, there are companies that sell software for the design of their chips. 
• Those companies are Cadence Design Systems (Nasdaq: CDNS) – which is up 350% in the past 5 years. 
• And Synopsys (Nasdaq: SNPS), which is up which is up 391% across the past five years. 
• The point: when AI sweeps an industry, being the foundational software that sells to it can be very lucrative! 
• Likewise in the near future, being the software that sells to drug discovery companies could be an attractive position. 
• And for drug discovery, there is a computational platform named Schrodinger. 
• Right now, Schrodinger is tiny – it has a market cap of about $1.5 billion and is losing money at a rapid clip. 
• Recent results also haven’t been great. Maybe Schrodinger doesn’t deserve the title of a “Growth Stock” with the results it has posted in recent quarters. 
• Yet, the long-term play for the company is its software business. That side of the company has grown strongly from $66 million in 2019 to $159 million in sales today.  
• This stock is high risk and high reward. 
• However, the drug discovery industry is a strong bet to be the next place that AI could cause a massive step change in demand. That opportunity is attractive enough that we wanted to get Schrodinger on investors’ radar as one more way to play the AI boom.

Transcript:

All right, Eric, everybody wants to ride the AI boom right now, but we’ve seen what’s happened with NVIDIA’s share price.

And if we look at chips, like whether it’s from NVIDIA or Intel or AMD, that sort of seems like the direct and obvious play.

We always like to look at sort of the second derivative plays and what are the ways to benefit from AI in other sectors.

One of the ones that’s most interesting to me is health care.

And let me just set the table for investors here really quickly.

NVIDIA’s own CEO has talked about the value that AI could bring to the healthcare sector.

And we’ve seen the incredible breakthroughs that Google’s own Alpha Fold has brought in medicine with protein discovery.

So this is not all speculation.

We are already seeing AI making really meaningful discoveries and progress in this space.

So I’m really interested in how AI can affect the healthcare industry and accelerate drug discovery and protein discovery.

And Eric, you wanted to highlight a drug stock that’s not on many investors’ radar, but it could be one of the biggest growth markets there is.

Yeah, it’s small.

I think that’s, you know, a wonderful tee up about the situation, especially saying that second derivative plays.

You know, for investors who are watching the growth in data centers, you know, the first thing that’s going to be obvious is NVIDIA is going to be making a lot.

But look at the next impact, which is something like the growth in liquid cooling, and that propelled a stock like Vertiv to 550% return.

So getting ahead of that second derivative play in these markets can really make investors a lot of money.

So we’ve got generative AI, it’s boosting stocks like NVIDIA right now, and it’s going to companies like banks that are using it to make their operations more efficient.

But there’s probably going to be a few headline – other areas where its impacts are very apparent.

I think robotics is a big area.

We’ve seen the headlines from Elon Musk basically saying that he believes optimists eventually will be worth more than their cars will be.

But the other big area, as you know, it’s drug discovery and biotech companies.

They’re huge buyers of NVIDIA’s gear.

If you look behind NVIDIA, how does NVIDIA make its chips?

Well, there’s software for making semiconductors.

And these companies are Cadence Design Systems, which is up 350% in the past five years, and Synopsys, which is up 391% the past five years.

Point here being: when AI sweeps through an industry, being the software that sells to that industry is a very good place to be if you can get there.

And likewise, in the near future, being the software that sells to drug discovery companies, that could be a pretty attractive position.

So for drug discovery, there’s a computational platform named Schrodinger.

Right now it’s tiny, has a market cap of 1.5 billion.

It’s losing money on a rapid clip.

Recent results, frankly, haven’t been great, and maybe it doesn’t even deserve a title of a growth stock with what it’s posted.

But this is a long-term play for the company in its software business, which has grown strongly from about $66 million in revenue in 2019 to $159 million today.

The stock, it’s definitely high risk, high reward.

But again, this industry is the next place that AI could cause a massive step change, as you mentioned, that second derivative play.

I believe that’s attractive enough to get this stock on investors’ radar because a lot of people are looking for that next way to play the AI boom.

Just one warning of course is with the high risk high reward.

If you’re going to look into the stock, make sure to size it to something that you know you could see going to zero because the upside is there, but you know this is a stock that has some risk to it still.

One stock that I think a lot of investors aren’t thinking about.

So I think you should put it on your radar today.