One looks like a solid option. The other one, not so much.
Everyone wants a piece of the fast-growing and highly promising artificial intelligence (AI) market. Various famous names on Wall Street have somewhat different picks in the field, although the same few select corporations seem to get most of the attention. Perhaps the average investor can learn a lot by turning to these Wall Street gurus and cheating off their notes.
With that as a backdrop, let's consider two AI picks among Cathie Wood's favorites: Meta Platforms (META -0.21%) and Recursion Pharmaceuticals (RXRX -5.66%). Ark Invest, the asset management company Wood leads, has both stocks in its top 20 combined holdings.
But should investors follow Wood's lead with these AI picks? Let's find out.
1. Meta Platforms
Meta Platforms is quickly establishing itself as a notable player in the AI race. The company has implemented various AI-related initiatives throughout its business, efforts that are somewhat contributing to its financial results. The best example is the rapid growth of Meta's Reels, short-form videos that have grown in popularity in recent years, partly due to an AI-powered recommendation algorithm.
There are other significant developments for Meta Platforms in AI, particularly its large language model called Llama. It was first released last year but is already in its third iteration. It also powers Meta AI, a virtual assistant the company created. According to management, Meta AI's reception has been positive. CEO Mark Zuckerberg explained Meta Platforms' aim with this initiative: "Our goal with Meta AI is to build the world's leading AI service both in quality and usage."
That's ambitious, and if the company can make that happen, it will reap immense benefits. But Meta Platforms isn't just an AI play. AI isn't contributing massively to its sales yet. Most of its revenue still comes from advertising. Meta Platforms boasts one of the largest ecosystems in the world. It had 3.24 billion daily active users as of the end of the first quarter, an increase of 7% year over year. That's an incredibly valuable hub of potential customers.
Meta Platforms' revenue jumped by 27% year over year in Q1 to $36.5 billion. Its net income came in at $12.4 billion, 117% higher than the previous year's comparable quarter. The business is clearly doing well despite some issues it faced about two years ago with the decline in advertising spending. Meta Platforms' free cash flow is also moving in the right direction: It landed at $12.5 billion for the period, up 81.3% versus the prior-year quarter.
Meta's ability to generate revenue and cash flow is more than supporting its investments in AI and the metaverse, two potentially massive long-term opportunities. Though not just an AI play, Meta Platforms is one of the better stocks to buy in the field, in my view. The company should deliver outsize returns for a long time.
2. Recursion Pharmaceuticals
Recursion Pharmaceuticals is trying to use AI to speed up the discovery and development of innovative medicines. The current paradigm is incredibly slow, costly, and risky. Brand-new therapies can take a good decade to move from the discovery phase to the launch phase. Many of those that get to the finish line never generate particularly impressive sales.
Recursion developed an operating system that tests various clinical compounds against a database of human genes. Think of it as a virtual, automated AI-powered laboratory, one that conducts up to 2.2 million experiments per week, according to the company. Recursion Pharmaceuticals' approach could significantly cut the time needed to launch new drugs.
That means these medicines will generate more sales (since they will spend more time on the market under patent protection), and -- more importantly -- they will get to patients faster, potentially saving thousands more lives. Recursion Pharmaceuticals doesn't have any approved products, but it has several pipeline candidates, including a few in phase 2 studies. Meanwhile, the company generates little revenue and is consistently unprofitable, like most clinical-stage drugmakers.
The biotech has attracted the attention of some big names in the industry. It signed an agreement with Bayer to aid in developing cancer medicines. Recursion Pharmaceuticals will receive up to $1.5 billion in various development milestones associated with this product and royalties on approved medicines. The company also partnered with Nvidia to create generative AI applications designed to help in drug discovery. The deal came with a $50 million equity investment from Nvidia.
That's all well and good, but Recursion Pharmaceuticals remains a risky stock to invest in, like nearly every clinical-stage biotech. Some might argue that it should be considered a tech stock, but until the technology it is implementing produces tangible results, it's hard to do much with that. Recursion Pharmaceuticals' shares could skyrocket if it turns out that its approach works as intended. Until then, risk-averse investors should watch from the sidelines.
Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool's board of directors. Prosper Junior Bakiny has positions in Meta Platforms. The Motley Fool has positions in and recommends Meta Platforms and Nvidia. The Motley Fool has a disclosure policy.
