Artificial intelligence (AI) is transforming the global landscape, with corporations striving to become leaders in this domain and investors eager to invest in the most promising AI enterprises. Despite this excitement, some well-known companies in the AI sector have experienced significant increases in their stock prices over the past two years, leading to higher valuations.
In the AI healthcare sector, two companies, Recursion Pharmaceuticals (ticker: RXRX) and Teladoc Health (ticker: TDOC), have underperformed in the market over the past year. Nonetheless, if these companies’ ambitious AI-focused initiatives succeed in the long term, they have the potential to provide substantial returns. This brings into question whether these stocks are worthy investments.
Recursion Pharmaceuticals focuses on utilizing AI to expedite the traditionally slow and costly process of drug discovery and development. Developing a new drug often takes a decade or longer and costs hundreds of millions of dollars. In the U.S., new therapies have a 20-year patent life, meaning once clinical trials consume half of this period, only a decade is left for revenue generation before facing competition from generics. Recursion aims to reduce the time needed to launch new therapies, which could lead to less expenditure, longer patent protection, higher sales, increased margins for drug manufacturers, and potentially lower prices for consumers. These objectives could significantly influence the pharmaceutical industry.
The company employs an AI-based operating system to test compounds against a comprehensive library of human genes, identifying the most promising ones for clinical studies. Recursion has already demonstrated promising early results, investing less time and money compared to the industry average for advancing its pipeline from discovery to human trials. Furthermore, the company has partnered with major pharmaceutical firms such as Roche Holding and Bayer, which could support Recursion with funding.
Despite having over half a dozen programs in progress, Recursion’s stock is still trailing the market. The company has yet to introduce a single medicine and lacks candidates in phase 3 clinical trials. Therefore, it may take some time to prove that its platform can yield desirable results. Additionally, risks include potential clinical and regulatory setbacks, competition from other drugmakers utilizing AI, or competitors countering Recursion’s plans to license its operating system. Thus, while the company presents significant potential upside, there are also considerable risks involved. Investors must carefully weigh these factors.
Teladoc Health specializes in telemedicine but has faced considerable challenges in recent years. The company has seen slower revenue and visit growth, intense competition impacting its market share, particularly for its virtual therapy service, BetterHelp, and continued net losses. To regain momentum, Teladoc considers AI as a critical element of its strategy. Within its chronic health management platform, Teladoc employs AI to predict patients with type 2 diabetes at risk of poor outcomes and sends these patients personalized AI-generated email recommendations, which a study has shown to improve outcomes.
Additionally, Teladoc deployed its Virtual Sitter solution in hospitals, leveraging AI to detect movements that might cause patient falls, a significant concern in many healthcare facilities. The company likely plans to continue developing AI-based initiatives to enhance internal efficiency and productivity. Furthermore, Teladoc is testing other recovery strategies.
Teladoc’s international market presence, where revenue growth has accelerated, could contribute positively to its performance. In 2024, the company’s revenue decreased by 1% year over year to $2.6 billion, but international sales climbed by 12% to $409 million. Given its extensive ecosystem, serving over 90 million customers and the growing telemedicine field, Teladoc has the potential to return to robust revenue growth and become profitable. Despite this potential, the company has not yet achieved this, though it does enjoy favorable gross margins.
Currently, Teladoc is heavily investing in marketing, and while reducing these expenses could become feasible if the company gains stronger market traction, the competitively evolving telemedicine industry might delay such cost reductions. Although the international business is aiding sales growth, it might also contribute to a rise in expenses. Therefore, Teladoc’s future prospects remain uncertain. While successful execution of its plans could lead to substantial returns, only investors prepared to handle considerable risk and volatility should consider investing in the company.
