2023-09-29 03:49:47 ET
Summary
- Schrödinger is a leading AI drug discovery company with a comprehensive platform used by researchers and scientists worldwide.
- The company's flagship product, Maestro, integrates various proprietary software tools for molecular modeling and simulation.
- SDGR has experienced significant growth and has established itself as the industry standard in the AI revolution in healthcare.
- While expensive, the stock has recently dipped into oversold territory. We think it's time to take a nibble.
Schrödinger ( SDGR ), to be blunt, is one of the coolest companies on the market today.
In case you're unfamiliar with this stock, don't worry - in this article, we're breaking down everything you need to know about this revolutionary company in detail, to help you determine whether or not it deserves a spot in your portfolio.
Spoiler alert: To us, it certainly does.
What Does Schrodinger Do?
3 words: AI Drug Discovery.
Alright, alright. Perhaps a few more words are needed.
In short, SDGR is a life sciences technology company that develops and commercializes computational modeling and simulation software for drug discovery and materials science.
The company's software is used by researchers and scientists around the world to accelerate the discovery and development of new drugs and materials.
Zooming in, SDGR's software is used to model and simulate a wide range of biological and materials science systems, including proteins, nucleic acids, membranes, and small molecules.
From there, users of SDGR's products can begin to predict the properties of new drugs and materials, design experiments, and understand the mechanisms of disease, which can all lead to the discovery of new formulas and compounds that can be used in a treatment setting.
SDGR counts a number of heavy hitting customers, like Pfizer ( PFE ), Merck ( MRK ), Novartis ( NVS ), and the National Institute of Health among its customer base.
The Product
On the product front, the company's flagship product, Maestro, is a comprehensive platform that integrates all of SDGR's software tools. Maestro is used to build, simulate, and analyze molecular models.
The platform is made up of the following modules:
- LiveDesign : A software tool for designing new drugs and materials.
- Glide : A software tool for predicting the binding affinity of small molecules to proteins and other biological targets.
- Prime: A software tool for preparing and optimizing molecular models for simulation.
- Materials Science Suite : A suite of software tools for modeling and simulating materials systems.
SDGR also offers auxiliary services, like:
- Cloud Computing : Schrödinger offers cloud-based access to its software products.
- Consulting : Schrödinger offers consulting services to help customers use its software to solve specific scientific problems.
- Training : Schrödinger offers training courses on its software products and services.
Finally, the company also participates in the drug discovery process itself. Having built the software platform, company personnel are uniquely well positioned to use the software most effectively. This dynamic spawned SDGR's own, in-house drug discovery unit.
As a result, SDGR has inked development agreements with huge players in the space, like Thermo Fischer Scientific ( TMO ) and Twist Bioscience ( TWST ), among others.
Taken together, SDGR is effectively at the forefront of the AI revolution in healthcare. As doctors and health professionals begin using computational platforms to discover drugs and other helpful molecules, they will choose Schrödinger as their platform of choice.
The company is the leader in the space, with the biggest reach and the most customers out of anyone:
In addition, the company's software products are already ingrained in big pharma workflows, which makes Maestro the industry standard:
But how has this amazing AI compute platform translated financially?
Financial Results
Essentially, the company has grown like a weed, as TTM revenue is up substantially over the last few years:
This revenue growth hasn't translated to TTM free cash flow growth, however, as profitability has remained elusive:
That said, there's been some good news recently on that front.
The company seems to be turning a corner on the profitability. Over the last two quarters, the company has reported positive earnings results on the back of lower operating cost growth:
It's true that revenue was down in the most recent quarter, but this mostly has to do with bumpy drug discovery revenue related to ongoing projects, which shouldn't be used as an indication of long-term results:
Together, the company has a barbell approach to revenue strategy: steady increases in the software sales segment, and bumpy but highly convex sales in the proprietary/partnership segment:
We believe that this approach to licensing and collaborations should spell out long term upside for shareholders. An increasing revenue floor with combined call options is an ideal scenario for long term investors.
Plus, if you need evidence of what a single good drug can do for you, look no further than Eli Lilly ( LLY ) stock:
Overall, the company has grown substantially from its revolutionary software product, and it's beginning to round the corner on profitability. This is typically an excellent time to invest in a company's lifecycle.
Valuation
You may be thinking that this sounds like an ideal investment - and it's true. Management has structured its software competence into solid growth and top-tier partnerships, in order to embed itself in the future of medicine.
You may also be worried about the valuation.
We won't lie; it is high.
Trading at just under 9x sales, SDGR trades at a significant premium to world-beating tech companies, like Apple ( AAPL ) and AMD ( AMD ):
However, the valuation is far more reasonable than it has been in the past (at 55x sales!!), for whatever that's worth.
The company is also expensive on an FCF basis, trading at 65x:
Considering that the company has only recently become profitable, though, it's not the fairest measurement.
Finally, when compared with its sector, Seeking Alpha's Quant Rating system gives SDGR a rating of 'C-', which we think is generous:
To us, this is likely a result of the fact that many of SDGR's results here are not meaningful, which skews the results to look a bit better than they are.
All in all, SDGR is a high-powered growth company, but it is expensive.
If there's a silver lining in this, is that the company (in our view) is likely to be 'expensive' for a long time into the future.
Thus, a purchase today may have less risk than initially anticipated, at least on multiple fronts.
Risks
There are many risks when it comes to investing in SDGR.
The first is the aforementioned valuation. If revenue growth slows considerably, or the company begins to see candidates in its pipeline fail, then results could be impacted or the multiple may come in.
The second, more concerning risk is that of competition. A big AI player, Google ( GOOG ), recently came into the space and formed a new company called Isomorphic Laboratories. Nothing seems to have come from this yet, but as more and more leading AI companies realize the potential in this space, it may become more crowded.
Given SDGR's level of entrenchment, we're not concerned about this as much as some are, but it's good to have on the threat horizon nonetheless.
Plus, the more AI drug discovery companies, the better (for humanity).
Summary
Ultimately, SDGR is a high-powered, expensive, AI growth story in an up-to-now untapped market. We're excited to see the company's market cap balloon as it continues to redefine the way we discover drugs and other molecules used in the material sciences.
While the valuation is a bit overbaked and there are some risks to the story, it's hard to argue that the long-term potential of SDGR isn't incredibly attractive.
Recently oversold, we think now is the right time to take a nibble.
Cheers!
For further details see:
Schrodinger: Leading The AI Healthcare Revolution