Accelerating AI Adoption And Precision Medicine Will Empower Computational Breakthroughs

Key Takeaways

• Accelerating adoption of AI-powered software, cloud solutions, and regulatory engagement could drive substantial growth in both revenue and market reach.
  
• Strategic positioning in precision medicine and expanding collaborations position the company for sustained earnings growth and outsized industry influence.
  
• Reliance on existing clients, elevated operating costs, intensifying competition, and regulatory uncertainty threaten long-term software revenue growth and profitability.

Catalysts

Develops physics-based computational platform that enables discovery of novel molecules for drug development and materials applications.

• Analyst consensus believes software revenue growth will continue led by recurring contracts and customer scale-ups, but given the unprecedented 100% retention rate among top customers and the accelerating adoption of hosted/cloud solutions, there is significant upside for rapid expansion in annual contract values, which could push revenue and gross margin much higher than currently forecast.
  
• While analyst consensus expects new AI and machine learning modules like predictive toxicology to enhance offerings and attract larger client deals, this likely understates the potential for these tools to become industry standards-regulatory momentum and early FDA engagement could catalyze broad adoption, substantially increasing both software revenue growth and net margins as separate premium services.
  
• As computational technologies become central to precision and personalized medicine, Schrödinger's ability to deliver differentiated, clinic-ready molecules more efficiently than traditional methods positions its proprietary and collaborative drug discovery programs for outsize milestone payments, royalties, and recurring long-term revenue, driving superior earnings growth.
  
• The company's platform investments and AI-powered enhancements are increasing accessibility for researchers without computational backgrounds, creating the foundation for mainstream, cross-disciplinary adoption across both traditional pharma and the rapidly growing biotech startup market, which should accelerate customer growth and expand Schrödinger's addressable market far beyond current expectations.
  
• With global biopharma R&D budgets rising and a trend toward outsourcing early discovery, Schrödinger's strong balance sheet, disciplined cost reductions, and continuous collaboration expansion position it to capture a disproportionate share of this market shift, leading to lasting improvements in earnings and operating leverage.

Schrödinger Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more optimistic perspective on Schrödinger compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts.
• The bullish analysts are assuming Schrödinger's revenue will grow by 19.7% annually over the next 3 years.
• Even the bullish analysts are not forecasting that Schrödinger will become profitable in next 3 years. To represent the Analyst Price Target as a Future PE Valuation we will estimate Schrödinger's profit margin will increase from -76.2% to the average US Healthcare Services industry of 8.8% in 3 years.
• If Schrödinger's profit margin were to converge on the industry average, you could expect earnings to reach $35.8 million (and earnings per share of $0.48) by about August 2028, up from $-181.3 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 87.1x on those 2028 earnings, up from -7.9x today. This future PE is greater than the current PE for the US Healthcare Services industry at 58.7x.
• Analysts expect the number of shares outstanding to grow by 1.03% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.0%, as per the Simply Wall St company report.

Schrödinger Future Earnings Per Share Growth

Risks

• Sustained operating losses and the need for significant R&D investment, highlighted by a net loss of 43 million dollars in the last reported quarter despite a 16 percent increase in revenue, could continue to pressure net margins and delay the company's path to long-term profitability.
  
• The company's software revenue growth is primarily driven by expanded usage within existing accounts rather than new customer acquisitions, which, combined with challenges in the biotech sector and macroeconomic headwinds, could restrict future recurring revenue growth.
  
• An increasingly crowded competitive landscape, including large technology firms and the rise of open-source computational chemistry tools, threatens to erode Schrödinger's technological advantage, potentially undermining pricing power and exerting downward pressure on long-term software revenues and margins.
  
• Ongoing regulatory uncertainty and evolving privacy requirements in AI-driven drug discovery, as well as delays in achieving feedback and endorsement for new platforms like predictive toxicology from agencies such as the FDA, could slow software adoption and delay the realization of future revenues tied to these initiatives.
  
• The trend among pharma clients toward building proprietary computational platforms, especially as Schrödinger's growth has come mainly from deepened existing relationships rather than new logos, increases the risk of customer churn, which could negatively impact software revenue sustainability and overall earnings trajectory.

Valuation

• The assumed bullish price target for Schrödinger is $33.0, which is the highest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Schrödinger's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $33.0, and the most bearish reporting a price target of just $20.0.
  
• In order for you to agree with the bullish analysts, you'd need to believe that by 2028, revenues will be $408.2 million, earnings will come to $35.8 million, and it would be trading on a PE ratio of 87.1x, assuming you use a discount rate of 8.0%.
  
• Given the current share price of $19.38, the bullish analyst price target of $33.0 is 41.3% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.