Schrödinger, Inc. (SDGR) shares are down 14.4% year-to-date. Despite this, I’m bullish on this stock.
I believe this stock, supported by a rosy outlook for the market and encouraging trends in demand for its services, should have no trouble recovering once market headwinds pass.
Schrödinger’s Business
Schrödinger’s goal is to develop drug and material applications faster and more cost-effectively than conventional methods by using physics-based computer models.
Biopharmaceutical and manufacturing companies use Schrödinger technology, as do universities and public laboratories.
Known worldwide, Schrödinger’s technology is also used by its own multidisciplinary drug discovery team, as it collaborates with outside scientists and develops the company’s therapies to address unmet medical needs.
The Physics-Based Model
A physics-based model is a model that attempts to simplify the complex system of laws of nature and, as such, therefore intrinsically contains the concepts of time, space, causality, and generalizability.
Thus, physical, chemical, biological, and geological processes develop according to these natural laws.
Q4 and FY-2021 Results
The last quarter of 2021 was strong in terms of revenue growth. In fact, revenue increased 40% to $46.2 million, from $33 million in the same quarter a year ago.
It wasn’t enough to stop Schrödinger from showing a net loss of $0.43 on its income statement, missing the analysts’ average estimate by $0.04.
In terms of full-year results, Schrödinger posted a net loss of $1.42, missing analysts’ average estimate by $0.06 on total 2021 sales of $138 million. Total revenue rose nearly 28% year-over-year, beating analysts’ median forecast by $9.2 million.
The software revenue segment accounted for 82% of total revenue and grew 22% year-over-year. The Drug Discovery System business segment generated the remaining 18% of total revenue for 2021 and grew 59% year-over-year.
Operational Efficiency Analysis
The company still has a lot of work to do to keep operating costs as low as possible, as they increased by 42% between 2020 and 2021.
This is reflected in the following comparison, which is far from positive: Schrödinger’s weighted average cost of capital is 8.6%, while its return on invested capital is -14.9%.
So, if Schrödinger wants to stop the destruction of value while aiming for growth, it needs to generate returns that match its cost of capital. To achieve this, the company must continue to grow its revenue and adopt a more disciplined approach when investing.
However, the company appears to be heading in the right direction. Based on positive trends, it is possible to be optimistic that the company has found the cornerstone for better business performance.
These trends are the growing value of the group of the wealthiest customers and the increasing number of small- and medium-sized customers choosing the Schrödinger platform.
Market Outlook
The company should benefit from the expected growth of the global information technology (IT) market.
The Business Research Company estimates that its size will grow at a CAGR of 11.2%, from $8.38 trillion in 2021 to nearly $13.82 trillion in 2026.
Schrödinger Forecasts
For FY 2022, the company expects revenue to grow 17% to 31% year-over-year to $161 million to $181 million.
Operating expense growth is expected to slow down slightly this year.
Sell-side analysts on Wall Street estimate that Schrödinger’s net income will fall 40.1% this year and then increase 42.2% in 2023 (from 2022).
Balance Sheet
Schrödinger’s balance sheet is solid, as evidenced by the Altman Z-Score of 6.54, suggesting the company is in safe zones.
For those that may not know, the Altman Z-Score indicates the probability that a company will go bankrupt. A value greater than or equal to 3 indicates that a company is in the “safe zone,” such that the probability of bankruptcy is extremely low or non-existent.
Wall Street’s Take
In the past three months, five Wall Street analysts have issued a 12-month price target for SDGR. The company has a Strong Buy consensus rating based on five unanimous Buy ratings.
The average Schrödinger price forecast is $73, implying 144.8% upside potential.
Valuation and Technicals
Shares are changing hands at $29.82 as of the writing of this article, for a market cap of $2.12 billion, a P/E ratio of -21.1, and a 52-week range of $23.14 to $79.95.
The stock has a price/book ratio of 3.8, a price/sales ratio of 15.4, a price-to-cash-flow ratio of -30, and a price-to-free-cash-flow ratio of -27.2.
Because of the recent drop, the stock price is below its 50-day moving average of $31.14. It also trades significantly below its 200-day moving average of $46.13.
Conclusion
The company needs to be more efficient in allocating resources to growth projects.
Trends in certain key business performance metrics indicate that the organization is on the right track to improve this aspect.
Supported by growing global demand for information technology, this stock should rally in the post-Ukrainian war era.
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