C3.ai (AI 3.02%) and BigBear.ai (BBAI 8.43%) both develop artificial intelligence (AI) software for enterprise and government customers. C3 develops AI algorithms that can be plugged into an organization's software infrastructure to accelerate and automate certain tasks. BigBear's modules can also be plugged into an organization's software to mine and aggregate data from disparate sources.
Both stocks have gone on wild rides since their market debuts. C3 listed its IPO at $42 in Dec. 2020, and its stock skyrocketed to a record high of $177.47 that same month. However, it now trades at about $32. BigBear went public by merging with a special purpose acquisition company (SPAC) in Dec. 2021, and its stock started trading at $9.84 and reached its all-time high of $12.69 last April. But today it's only worth about $3 a share.
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C3.ai and BigBear.ai both attracted a lot of attention amid the buying frenzy in AI stocks, but they lost their luster as their growth cooled off, they racked up persistent losses, and rising interest rates compressed their valuations. Should investors still buy either of these volatile stocks as a long-term play on the secular expansion of the AI market?
C3.ai's growth rates are stabilizing
C3's revenue only rose 6% in fiscal 2023 (which ended last April) as the macro headwinds drove companies to rein in their software spending. Competition from other similar platforms, along with the company's decision to pivot from sticky subscriptions toward usage-based plans to attract more customers, exacerbated that slowdown.
But for fiscal 2024, it expects its revenue to rise 15%-16% as the macro environment warms up, it gains more usage-based customers, and it rolls out new generative AI tools. However, its adjusted gross margin still shrank nine percentage points year over year to 69% in the first nine months of fiscal 2024, and it no longer aims to turn profitable on a non-GAAP (generally accepted accounting principles) basis for the full year.
C3 ditched its profitability goals in favor of developing its new generative AI tools. That might seem like a forward-thinking strategy, but it's also a defensive move that suggests that new generative AI tools could threaten its long-term growth.
C3 also relies on a joint venture with the energy giant Baker Hughes for about 30% of its revenue, and there's no guarantee that deal will be renewed when it expires in fiscal 2025. It ended the third quarter of fiscal 2024 with $723 million in cash, cash equivalents, and marketable securities, but analysts expect it to post a net loss of $302 million for the full year. With a market cap of $3.9 billion, C3 isn't cheap at 13 times this year's sales -- and it still has a lot to prove.
BigBear.ai's growth has slowed to a crawl
BigBear serves major customers like the U.S. Department of Defense and the Department of Homeland Security, and it integrates Palantir's data mining services into its own AI modules. But its revenue stayed flat year over year at $155 million in 2023. That was well below its pre-merger target of $388 million for the year. Its gross margin also dropped from 28% in 2022 to 26% in 2023.
It blamed that slowdown on the macro headwinds and the bankruptcy of its major customer Virgin Orbit. To rejuvenate its business, it acquired the near-field vision AI technology developer Pangiam in early March. That $70 million all-stock deal could boost its near-term revenue, but it will also dilute its existing shares. It expects its revenue to rise 26%-39% in 2024. But with a market cap of $670 million, its stock doesn't look expensive at three times the midpoint of that forecast.
BigBear also remains unprofitable by GAAP and non-GAAP measures, but it narrowed its adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) loss from $17 million in 2022 to $3 million in 2023. For 2024, analysts expect it to eke out a slim positive adjusted EBITDA of about $1 million as it narrows its GAAP net loss from $60 million to $37 million. Those bottom-line improvements are encouraging, but it ended 2023 with just $33 million in cash and equivalents.
The better buy: C3.ai
I'm not a fan of either of these underdog AI stocks right now. But if I had to choose one over the other, I'd buy C3.ai because it's larger, it's growing faster, and it has a healthier balance sheet. BigBear seems to be struggling to scale up its business in a crowded market, and it hasn't proven that its business model is sustainable yet.
