Investing in growth stocks can lead to significant returns for investors in the long run. But oftentimes, the best returns come from smaller stocks, which have modest market values. These stocks can be risky options, but due to their low valuations, they tend to have the most room to rise higher if their businesses prove to be the real deal.
One stock that is your typical high-risk, high-potential-reward option is Recursion Pharmaceuticals (RXRX -0.99%). The company has a market capitalization of $2 billion, it doesn't have any approved products, it's burning through cash, and it may be years before the business is ever profitable. This is not a stock into which you'll probably want to make a big investment.
However, could it be worthwhile to put a more modest amount into the business, given the potential that the stock possesses? After all, the healthcare stock may be a 10-bagger in the future -- if it can come through on a fairly bold claim.
Can Recursion accelerate the time frame for drug discovery?
Last year, Recursion announced that tech giant Nvidia invested $50 million into its operations. Together, the businesses are working on drug development with the help of artificial intelligence. Recursion has a massive dataset that exceeds 23 petabytes and 3 trillion searchable gene and compound relationships. By deploying Nvidia's advanced computing capabilities on all that data, drug companies could speed up their drug discovery processes by being more efficient in their research efforts.
Recursion hopes that it can help develop its own pipeline with cutting-edge technology while also helping other companies. While there isn't anything significant to show for its collaboration with Nvidia so far, management is optimistic about what can be achievable in the future.
A bold claim that could make the stock soar
In a recent interview with CNBC, Recursion CEO Chris Gibson outlined the company's business and why it could be a potential game changer for many healthcare companies, saying, "To find the drug and get it into the clinic, I think we can shorten that from five or six years and hundreds of millions of dollars into, perhaps, one or two years and just $10 million or $20 million."
For drug companies to potentially save years and hundreds of millions of dollars in costs, it's not hard to see why Recursion's claims could make the stock an enticing buy for investors. A game-changing platform would certainly attract many customers, solidify the business, and strengthen its financials and long-term outlook.
The problem, however, is that Recursion's platform remains unproven. In the meantime, investors are taking on a considerable risk.
Recursion's fast rate of cash burn is a concern
During the first three months of the year, Recursion incurred a net loss of $91.4 million, which was higher than the $65.3 million loss it incurred in the prior-year period. It also burned through $102.3 million during that time frame from its day-to-day operating activities.
While the company still had around $300 million in cash and cash equivalents on its books as of the end of March, such a high burn rate makes the stock particularly risky as it could increase the need for ongoing cash infusions (i.e., stock offerings). Over the past few years, the company has drastically raised its share count.
RXRX Shares Outstanding data by YCharts
An increase in shares dilutes existing shareholders and puts downward pressure on the stock price in the process. In the past 12 months, Recursion's stock has generated gains of less than 2%, and it has underperformed the stock market despite all the hype and excitement surrounding its collaboration with Nvidia.
Is Recursion stock worth taking a chance on?
While Recursion Pharmaceuticals' ambitions are exciting, they are still as yet unproven. And that could leave investors vulnerable to a steep sell-off if things don't go as expected, as it effectively sets a high bar.
Then there's also the company's incredibly high burn rate, which could make it difficult to even hold onto the stock for the long term as the need for more stock offerings could put additional pressure on the share price. Recursion isn't a stock I'd invest in today, and even if you are comfortable with risk, there may still be better options out there to consider.
