The $50 million purchase could turn out to be Nvidia's largest investment yet.
Nvidia (NVDA 6.18%) There isn't just one leader in developing the key hardware fueling the artificial intelligence (AI) boom. It is a major investor in other AI companies, often including equity investments in its business relationships. In December, his portfolio of AI stocks crossed the $100 million threshold, which required him to file a Form 13-F with the SEC to disclose all of his holdings.
Nvidia's portfolio isn't very broad, with only five stocks, and 97% of the portfolio is concentrated in just two holdings.
is the largest piece of Nvidia's portfolio. ARM Holdings, the chip architecture company the AI giant sought to buy for $40 billion in 2020. At its current price, it grabbed $190 million worth of shares, representing just a small slice of the $100 billion company.
Image Source: Nvidia.
Nvidia's second-largest holding represents a more meaningful stake in an innovative AI company. The company has also found favor with Cathy Wood's ArchInvest, which bought more shares earlier this month, increasing its position as the company's largest shareholder. Importantly, investors can still invest in the stock near the same level Nvidia did last July. It's no wonder Wood and his team have snapped up shares recently.
Nvidia is the second largest holding with a 3.4% stake. Recursion Pharmaceuticals (RXRX 3.57%). The company is using AI to mine data and discover new potential drugs. And if it successfully develops a breakthrough drug, it could easily become Nvidia's biggest investment yet.
Using AI to move faster and reduce costs
Recursion is a biotech company that aims to improve the drug discovery process by using big data and AI. It combines public datasets and its own proprietary data to discover new potential compounds. It then uses its algorithms to filter its compounds into viable candidates for development to treat rare diseases or specifically target specific cancers.
Recursion says its process reduces the number of development candidates from its initial screen to 10% of what a traditional drug discovery company might do. This allows him to focus only on options with the highest probability of success, enabling him to spend less and move faster.
It currently has five treatments in Phase 2 clinical trials. Each treats a patient population of less than 1 million, with most treating populations of less than 100,000. This means that if it succeeds in bringing one of these treatments to market, it will likely be the only competitor serving this population.
If Recursion can prove that its method is consistently more successful, faster, and more cost-effective than others in the industry, it presents a lot of opportunity. Not only can it continue to discover and develop new treatments, but it can also license its platform to other drugmakers working in more complex areas. It can provide upfront capital to expand its operations.
There is already a partnership with the company. Roche And Bayer To help discover oncology targets and neuroscience therapies.
Should you invest with Nvidia and Cathie Wood?
Investing in Recursion is a big bet on the company's process of paying off a viable drug.
The company currently generates revenue primarily through its collaboration agreements with other drugmakers. It generated a total of $44 million for the company last year, up from $40 million in 2022.
Meanwhile, it's burning through cash as it works to discover and develop drugs while building its AI platform. R&D expenses rose to $241 million last year from $156 million last year. And total operating losses increased from $246 million to $350 million.
The company ended last year with $392 million in cash on its balance sheet, which gives it some runway. But it will likely need to raise more cash soon to continue financing its operations. This will likely come through equity investments, which can dilute shareholder stakes.
All of this makes Recursion a risky investment. The payoff can be huge, though. It is a relatively small company with a market capitalization of $1.85 billion. That's a drop in the bucket for the overall pharmaceutical industry, which generated about $1.6 trillion in sales last year.
For investors looking for home run stocks, you won't have a bad company to invest in at Recursion. Nvidia has backed it, along with several other members of the AI and pharma industries, and Cathy Wood has made it one of the largest holdings in her genomics-focused ETF. But it's also possible that you swing and forget.
Adam Levy has no positions in any of the stocks mentioned. The Motley Fool has positions and recommends Nvidia. The Motley Fool recommends Roche Ag. The Motley Fool has a Disclosure Policy.