We came across a bullish thesis on Schrödinger, Inc. (SDGR) on Value Degen’s Substack by Unemployed Value Degen. In this article we will summarize the bulls’ thesis on SDGR. Schrödinger, Inc. (SDGR) share was trading at $19.62 as of Sept 17th.
A scientist overlooking a high-tech laboratory, focusing on the technologies related to biotechnology.
Schrödinger (SDGR) is emerging as a compelling player in the intersection of software and biotech. Amid the downturn in big pharma stocks following the end of the COVID-19 vaccine boom, Schrödinger stands out by guiding to strong growth. Unlike many of its peers, SDGR has carved a niche through its innovative approach to drug discovery, using AI-driven computer simulations to model billions of potential molecules, drastically reducing the time and cost of pharmaceutical R&D. With a massive Total Addressable Market (TAM) of $100-150 billion in pharma R&D, Schrödinger’s pitch is to offer an alternative to traditional, labor-intensive methods by generating and testing only the most promising candidates in the lab. However, adoption has been slow, with big pharma proving resistant to change, and smaller firms facing capital constraints since 2021.
To bypass this slow adoption, Schrödinger has started developing its own drug pipeline. Notably, one of these collaborations, with Morphic, is being acquired by Eli Lilly, providing a $48 million windfall and a potential royalty stream. Schrödinger’s strategy revolves around selling or partnering its drugs with big pharma to introduce its software into their workflows indirectly. By embedding itself into these companies, Schrödinger hopes to build long-term software relationships that drive future growth.
Schrödinger’s goal is to become a company half-reliant on recurring software revenue and half on royalty streams from its drug collaborations, although management acknowledges it will take 6-7 years for royalties to scale. Currently, Schrödinger’s software business is growing at a solid clip, with Q4 2023 revenues up 32% year-over-year. At $200 million in trailing twelve-month revenue and a $1.5 billion market cap, the company is priced at 8-10x sales—inline with other high-growth software companies.
Although still unprofitable, Schrödinger’s balance sheet appears solid, with 18 months of cash on hand and potential for future drug sales to provide funding. The company has a strong track record of selling or licensing drugs to major firms like Bristol Myers and Takeda, and it has two drugs that have received FDA approval from collaborations. Investors, however, are cautious given the complex mix of software and biotech, and the stock’s sharp drop from its pandemic highs. Still, with improving fundamentals and no dilution in sight, Schrödinger looks poised for a potential turnaround, especially if its upcoming Q4 results reflect further growth. Investors may have to be patient, but with the stock seemingly undervalued, Schrödinger presents a promising long-term opportunity.
Schrödinger, Inc. (SDGR) is also not on our list of the 31 Most Popular Stocks Among Hedge Funds. As per our database, 19 hedge fund portfolios held SDGR at the end of the second quarter which was 19 in the previous quarter. While we acknowledge the risk and potential of SDGR as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than SDGR but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article was originally published at Insider Monkey.