There’s a lot to like with this Google-backed healthcare AI stock.

What’s a tell-tale sign that a small artificial intelligence (AI) company has tremendous potential? When the small AI company attracts interest — and money — from a big AI company.

There aren’t many AI companies on the planet that are bigger than Google parent Alphabet (GOOG -1.30%) (GOOGL -1.21%). Few have AI track records as impressive as Alphabet’s. Its Google Brain (now part of Google DeepMind) invented AI transformer architecture — the “T” in ChatGPT. Google DeepMind developed Go-playing phenomenon AlphaGo and AlphaFold, an AI system that predicts the structures of proteins.

The Google team no doubt recognizes innovative new AI technologies when it sees them. And Google is backing a hot new AI company that conducted its initial public offering (IPO) last week.

The latest AI IPO

Eric Lefkofsky founded Tempus AI (TEM -16.86%) in 2015 and continues to serve as its CEO. The company was originally called Bioin but changed its name to Tempus Health in 2015, Tempus Labs in 2016, and Tempus AI in 2023.

Lefkofsky is no stranger to starting new businesses. He co-founded Groupon and venture capital firm Lightbank in 2008. He also co-founded InnerWorkings, Mediaocean, Echo Global Logistics, and Pathos AI.

Tempus uses AI to provide what it calls “intelligence diagnostics.” Its diagnostics tests are contextualized for individual patients using their clinical data. The company believes that its approach can help physicians prescribe more effective therapies for patients and help researchers accelerate the discovery and development of new therapies.

On Friday, June 14, 2024, Tempus conducted its IPO on the Nasdaq stock exchange. The healthcare AI company’s shares soared as much as 15% on the first day of trading and closed up almost 9%. Tempus AI’s market cap now stands above $6 billion.

Why does Google like Tempus AI?

Google’s financial relationship with Tempus AI dates back to June 2020. Tempus issued a convertible promissory note worth $330 million to Google as part of an agreement to use Google Cloud. Nearly five months later, Tempus gave Google $80 million of preferred stock to partially satisfy its original promissory note.

As you might expect, Google doesn’t always work out these kinds of financial arrangements with its small cloud customers. What did the tech giant see in Tempus to make it willing to strike this deal?

I suspect Tempus AI’s impressive growth was a key factor. The company’s revenue jumped 183% between 2002 and 2023. Although Tempus remains unprofitable, its adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) are trending in the right direction.

Tempus AI’s customer base underscores how much value its technology offers. Its products have been used by roughly 95% of the top 20 biggest public biopharmaceutical companies in the world. Tempus has partnerships with more than 200 biopharma companies. More than 7,000 physicians and over 65% of U.S. academic medical centers have used Tempus AI’s products.

Should you buy this hot new AI stock?

Risk-averse investors probably won’t like Tempus AI. Its stock could be highly volatile. As mentioned previously, the company isn’t profitable.

However, Tempus estimates that its oncology and neuropsychiatry genomics products target a total addressable market of over $70 billion. The addressable market for the company’s data and services products is at least $119 billion. Tempus thinks that its AI applications products focusing on algorithmic diagnostics could have a long-term market opportunity could be bigger than all of its other product lines combined.

The use of AI in healthcare diagnostics is still in its early innings. Tempus AI has already proven that it can succeed in this market. It has a seasoned management team. Google’s financial backing also says a lot. I think this hot new AI stock looks like a good pick for aggressive investors.

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Keith Speights has positions in Alphabet. The Motley Fool has positions in and recommends Alphabet. The Motley Fool recommends Nasdaq. The Motley Fool has a disclosure policy.

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