Artificial intelligence (AI) has taken over Wall Street. The leaders in this rapidly growing field are attracting significant attention. Many have produced outstanding returns over the past two years. Naturally, most investors want to cash in on this, but the biggest names in the industry tend to trade at steep premiums. It might be worth considering smaller, under-the-radar AI-focused companies that haven't performed well yet but boast significant upside potential.

And some think that description fits Recursion Pharmaceuticals (RXRX -1.48%), an AI-focused biotech company. The stock has attracted the attention of some of the most famous names in the investing world, including Cathie Wood, CEO of Ark Invest. But is Recursion Pharmaceuticals really worth investing in right now after shedding 35% of its value this year?

Image source: Getty Images.

Bad news trumps good news

Recursion Pharmaceuticals got some good news earlier this year. The U.S. Food and Drug Administration announced it would phase out animal testing in favor of other methods, including AI-based models. That fits right into the biotech's strategy.

Recursion Pharmaceuticals specializes in using AI to speed up the discovery and development of novel therapies, which is an incredibly expensive and time-consuming process. If Recursion Pharmaceuticals can achieve its goal of cutting the time and money it takes to develop drugs by meaningful amounts, its stock could skyrocket over the long run.

However, it isn't there yet, and in the meantime, it is facing problems leading to its share price falling. Recursion Pharmaceuticals recently released its first-quarter results, during which it announced it was streamlining its pipeline to focus on fewer candidates and deprioritizing others -- a fancy way of saying it is abandoning the development of some investigational therapies that did not look promising enough to justify the investment.

That's not necessarily a bad thing. But for a company that claims it can deliver competitive medicines in less time and with less money than its peers, it's a bit worrying that it has yet to send a single product to late-stage studies and is instead forced to abandon some candidates.

First, if Recursion Pharmaceuticals' AI-based algorithm is so effective at identifying promising compounds, why doesn't the company have at least one product in phase 3 clinical trials yet? Second, recent political developments threaten the company's ability to raise capital. The Trump administration cut federal funding that often trickles down to clinical-stage biotechs. These moves might make it harder for Recursion and others like it in the future. The biotech's shares recently fell due to growing fears of this outcome. Is there any hope for Recursion Pharmaceuticals?

A high-risk, high-reward play

The company's bulls might point out a few things. First, Recursion Pharmaceuticals' AI-based operating system (OS) isn't perfect, but one of its strengths could be its network effect. Successes and failures allow the company to fine-tune its OS, making future successes more probable. So, the fact that the company recently had to give up on some programs isn't the end of the world. It might actually help improve things.

Second, Recursion Pharmaceuticals has a reasonably strong cash position. It ended the first quarter with $509 million in cash and equivalents, down from the $603 million it had as of the end of 2024. The company thinks this will be enough to sustain its operations until mid-2027. It's also worth pointing out that Recursion Pharmaceuticals has partnerships with leading drugmakers, including Roche, Bayer, Merck, and Sanofi.

Recursion Pharmaceuticals could get more money from these successful pharmaceutical companies, even if it is more difficult for the biotech to access funding elsewhere. That said, Recursion Pharmaceuticals remains a high-risk option.

Any drugmaker without a single medicine in phase 3 studies carries above-average risk. In Recursion Pharmaceuticals' case, it has yet to release blowout phase 2 data from highly promising candidates. It also faces other headwinds, including the possibility that others will steal its modus operandi and develop better AI-based models for drug discovery, especially now that regulators are increasingly moving in that direction.

If Recursion Pharmaceuticals can achieve its goals, it could deliver life-changing results, but it is just as likely (if not more) that the company will fail. That's why only those with an appetite for risk and volatility should consider initiating a small position in this stock.