Should Investors Buy These 2 Beaten-Down Artificial Intelligence (AI) Healthcare Stocks?

Artificial intelligence (AI) is changing the world. Corporations are racing to establish themselves as leaders in the field, while investors want to cash in by putting their hard-earned money into the most promising AI companies. However, prominent names in this fast-growing space have seen their shares soar in the past two years, and the valuations of some have become quite expensive.

Two AI healthcare stocks -- Recursion Pharmaceuticals (NASDAQ: RXRX) and Teladoc Health (NYSE: TDOC) -- have lagged the market over the past year. But if these companies' ambitions (AI-related and otherwise) materialize over the long run, they could deliver market-beating returns. Are the stocks worth investing in?

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1. Recursion Pharmaceuticals

Recursion Pharmaceuticals is using AI to speed up the slow and expensive process of drug discovery and development.

It can take a decade or longer for a medicine to go from inception to the market, and typically costs hundreds of millions of dollars. New therapies have a 20-year patent life in the U.S., so after a decade of clinical trials, there's usually only one decade left to generate revenue until a product loses patent exclusivity and starts facing cheaper competition from generics or biosimilars.

Imagine cutting the time to launch therapies by a quarter or half. It would mean less money spent on the process, longer commercial patent life, higher sales from the drugs, higher margins for drugmakers, and likely lower prices for consumers. That means Recursion's ambitions could revolutionize the pharmaceutical industry.

The company uses an AI-based operating system (OS) that tests compounds against a vast library of human genes to find the most promising compounds to send to clinical studies. Recursion has already shown some promising early results, and has spent far less time and money than the industry average to get its current pipeline candidates from the early stages of discovery to human clinical trials.

Furthermore, Recursion has partnered with several pharmaceutical giants, including Roche Holding and Bayer, to develop medicines. These collaborators could help the mid-cap biotech with funding.

Recursion currently has over half a dozen programs in studies. Why, then, is the stock lagging the market? Despite its ambitious project, the company has yet to launch a single medicine. It doesn't even have candidates in phase 3 (late-stage) clinical trials. So it will be a while before it proves its platform can produce the results investors want.

In the meantime, a lot can go wrong for the company, including clinical and regulatory setbacks, other drugmakers developing AI-powered methods of speeding up drug discovery, or competitors undercutting its plan to license its OS down the line. In short, while Recursion's shares provide massive upside if its master plan works, there are also significant downsides and risks. Invest accordingly.

2. Teladoc Health

Teladoc Health is a telemedicine specialist. Its business has encountered severe headwinds in the past few years. Revenue and visit growth slowed, stiff competition ate into its market share -- particularly for its virtual therapy service, BetterHelp -- and it reported persistent, serious net losses.

Teladoc is looking to get back on the right track, and AI could be a key part of its strategy. The telehealth leader has implemented AI across its business in several ways. Within its chronic health management platform, the company used AI models to predict patients with type 2 diabetes at risk of uncontrolled outcomes. It also used AI to send personalized email recommendations to diabetes patients, which helped improve outcomes, according to a study.

Elsewhere, Teladoc's Virtual Sitter solution for hospitals uses AI to detect patient movements that put them at risk of falling, a serious problem in many facilities. Teladoc will likely continue conjuring up AI-based initiatives, including as a means to boost internal efficiency and productivity. It's also testing other ways to turn things around.

Teladoc's push in international markets, where its top line is growing faster, could continue to make an impact. In 2024, revenue declined by 1% year over year to $2.6 billion, but international sales grew by 12% to $409 million.

Given its massive ecosystem -- it serves a total of more than 90 million customers -- and the growth potential of telemedicine, Teladoc could eventually return to excellent top-line growth and turn a profit. That said, it hasn't been able to do so yet, despite juicy gross margins:

TDOC Gross Profit Margin (Quarterly) data by YCharts.

Teladoc is spending a lot of money on marketing efforts. Perhaps if it becomes better established, it can reduce these expenses, but given the increasingly competitive telemedicine industry, that might not happen soon. And although Teladoc's international business is helping pull sales growth in the right direction, it might also significantly increase its expenses.

So, Teladoc's future is a bit of an enigma. It could produce life-changing returns if everything works according to plan. Still, only investors comfortable with significant risk and volatility should consider initiating a position in the company.

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Prosper Junior Bakiny has positions in Recursion Pharmaceuticals and Teladoc Health. The Motley Fool has positions in and recommends Teladoc Health. The Motley Fool recommends Roche Holding AG. The Motley Fool has a disclosure policy.