The market has been harsh on most growth stocks this year, owing primarily to tariff-related recession fears.
In a volatile market, small-cap stocks, which are often considered riskier than their large-cap peers, tend to be overlooked. These are shares in companies with a small market capitalization, usually between $250 million and $2 billion. Small-cap stocks are more volatile than larger-cap stocks because they are often in the early stages of growth and lack financial stability. However, they have the potential to generate higher returns if the underlying business achieves its full potential.
Small-Cap Stock #1: Recursion Pharmaceuticals
With a market capitalization of $2.6 billion, Recursion Pharmaceuticals (RXRX) is a clinical-stage biotech company that uses cutting-edge automation, artificial intelligence (AI), and machine learning to accelerate drug discovery. The company is quickly establishing itself in the biotech sector, which is most likely why semiconductor giant Nvidia (NVDA) has invested in the company.
Recursion’s stock is down 3.6% in the year to date.
The Recursion Operating System (OS) is the company’s proprietary platform that combines various technologies such as robotics, AI, and massive amounts of biological data to accelerate drug discovery. Unlike traditional drug discovery methods, Recursion OS can analyze thousands of candidates at once, making the process much faster and smarter. To support its drug discovery initiatives, Recursion has strategically positioned itself through collaborations with industry giants. The company has collaborated with Roche (RHHBY), Genentech, Bayer (BAYRY), and Sanofi (SNY) to develop therapies in a variety of fields.
In 2023, Recursion announced a collaboration and $50 million investment from Nvidia to accelerate the development of its AI foundation models, including BioHive-2, an NVIDIA-powered AI supercomputer four times faster than its predecessor, BioHive-1. More recently, in August 2024, Recursion expanded its global footprint by acquiring UK-based biotechnology company Exscientia for $688 million. This strategic move is expected to strengthen Recursion’s drug discovery platform and expand its pipeline of potential therapeutics. The company has now completed the merger with Exscientia and anticipates at least $100 million in synergies. Post-combination, the company now has “10 clinical and preclinical programs, 10 advanced discovery programs, and more than 10 partnered programs.”
While strategic collaborations may help improve clinical trials, the company remains unprofitable. The net loss in 2024 was $463.7 million. At the end of the year, cash, cash equivalents, and restricted cash balances totaled $603 million. The company’s innovative approach to drug discovery sets it up for long-term success. However, it remains a high-risk, high-reward opportunity for aggressive investors willing to wait for the pipeline program to yield results.
Analysts maintain a cautiously optimistic outlook on Recursion's stock, rating it an overall "Hold.” Of the eight analysts covering the stock, one rates it a "Strong Buy," another as a “Moderate Buy,” and the remaining six as a “hold.” Its average target price of $9 indicates roughly 36.7% upside potential. Furthermore, its high target price of $11 implies a potential 67.1% gain over the next 12 months.
Small-Cap Stock #2: Ardelyx
Ardelyx (ARDX), unlike Recursion, is not a clinical-stage biotechnology company. Ardelyx, in fact, has two commercially approved products in the U.S. The company specializes in the development and commercialization of innovative treatments for gastrointestinal and cardiorenal diseases. Valued at $1.3 billion, ARDX stock is up 7.5% year-to-date.
Its flagship drug, tenapanor, marketed as IBSRELA, is approved for the treatment of irritable bowel syndrome with constipation (IBS-C) in adults. Additionally, the U.S. Food and Drug Administration (FDA) approved XPHOZAH (tenapanor) for the control of serum phosphorus in chronic kidney disease (CKD) patients undergoing dialysis.
Ardelyx has successfully transitioned from a development-stage biotech to a commercial-stage company, with revenue coming from IBSRELA and, most recently, XPHOZAH. In 2024, IBSRELA generated $158.3 million in net product sales in the U.S., while XPHOZAH generated $160.9 million. Total revenue reached $333.6 million, up from $124.5 million in 2023. While the company has started generating revenue, Ardelyx is still unprofitable. However, the net loss per share fell to $0.17 from $0.30 last year.
Management has high hopes for both drugs before their patents expire. IBSRELA is expected to generate net product sales in the range of $240 million to $250 million in the U.S. for the full year 2025. Management is confident that IBSRELA will achieve a 10% market share at its peak, generating more than $1 billion in annual U.S. net product sales before its patent expires. Likewise, XPHOZAH could generate $750 million in revenue in the U.S. alone before its patent expires.
Ardelyx has a strong balance sheet and sufficient cash reserves ($250.1 million in 2024) to support its commercialization efforts and future R&D.
The company’s strong product sales growth, strategic partnerships, and solid cash position have earned it a "Strong Buy” rating on Wall Street. Of the 12 analysts covering ARDX stock, 10 have rated it a “Strong Buy” while two rate it a “Hold.” The average target price of $10.86 indicates that the stock has 102.2% upside potential. Furthermore, with a high target price of $15, the stock has the potential to rise by 179.3% from current levels.
