BigBear.ai (BBAI 18.18%) went public by merging with a special purpose acquisition (SPAC) company on Dec. 8, 2021. The data mining company's shares started trading at $9.84 and climbed to an all-time high of $16.12 on April 6, 2022.

But today, the stock trades at about $2 per share. A $10,000 investment in BigBear.ai on its first trading day would have shrunk to just over $2,100. Let's see why the company initially impressed the bulls, how it let them down, and where the stock might be headed.

Why did BigBear.ai impress the bulls?

Before BigBear.ai went public, it provided some ambitious growth targets in its pre-merger presentation. The company claimed it could deliver a compound annual growth rate (CAGR) of 40%, taking revenue from $140 million in 2020 to $388 million in 2023 while expanding its gross margin from 30% to 50% and keeping its adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) margins in the high teens. It then aimed to further double its revenue to $764 million by 2025.

Management believed they could achieve that growth trajectory by organically expanding the company's Observe, Orient, and Dominate modules -- which are used to aggregate data from disparate sources -- and by "targeting critical and high-growth market arenas" such as business intelligence and analytics tools, AI data management, and next-gen cybersecurity platforms.

BigBear.ai notably integrated Palantir's Foundry services into its three main modules in late 2021. That partnership with Palantir, a much larger data mining company that serves many U.S. government agencies and a wide range of enterprise customers, likely helped convince the bulls that BigBear.ai had a bright future.

BigBear.ai had itself secured partnerships with the U.S. Department of Defense and other government agencies, and it allowed clients to integrate its modules into their existing software infrastructure instead of locking them into larger platforms. That flexible approach helped the company carve out a tiny niche in the crowded analytics market.

Why did the bears maul BigBear.ai stock?

BigBear.ai's prospects sounded promising, but it broadly missed its rosy pre-merger targets. From 2020 to 2023, its revenue only increased at a CAGR of 3.5% to $155 million -- far short of its original target of $388 million. Its gross margin shriveled to 26% last year while adjusted EBITDA margin turned negative in 2022 and 2023.

The company blamed the weakness on macroeconomic headwinds, slower government spending, and the bankruptcy of its major customer Virgin Orbit in early 2023. CEO Reggie Brothers stepped down in Oct. 2022 amid that slowdown and was succeeded by Mandy Long, a former IBM executive.

Long abandoned BigBear.ai's pre-merger revenue growth targets and focused on cutting costs and right-sizing the core business. As a result, adjusted EBITDA and cash flow turned positive in the second half of 2023, giving the company some breathing room to acquire the visual AI technology developer Pangiam in an all-stock deal this March.

In the company's latest shareholder letter, Long bluntly admitted that BigBear.ai "had to do the hard work to get our house in order" throughout 2023 as it overhauled the entire business. But for 2024, management expects revenue to rise 26% to 39% -- compared to its flat growth in 2023 -- as the macro environment stabilizes and it integrates Pangiam.

Those are steps in the right direction, but investors don't seem convinced BigBear.ai can maintain its momentum after it laps its acquisition of Pangiam. Analysts expect revenue to rise 31% in 2024 only for it slow to 13% in 2025. The company will remain unprofitable on a generally accepted accounting principles (GAAP) basis, but it's still shouldering $194 million in long-term debt while holding just $33 million in cash and equivalents on its balance sheet at the end of 2023.

Where is BigBear.ai stock headed?

BigBear.ai's slowing growth, persistent losses, and ugly balance sheet made it an easy target for the bears. It's still too dependent on rigid government contracts, and it lacks a meaningful moat against its larger data mining competitors.

On the bright side, the stock's valuation has fallen to 2.4 times this year's sales, and insiders have actually bought nearly three times as many shares as they sold over the past three months. Furthermore, nearly 23% of the float was still being shorted as of Feb. 29, so any positive news could spark a short squeeze and drive its stock higher. Its low enterprise value of $670 million might even make it a compelling takeover target for a larger tech company.

But those speculative considerations are no replacement for strong fundamentals, and over the next few quarters, I expect BigBear.ai to remain out of favor as investors focus on bigger and higher-growth plays in the data mining and AI markets. The company might gradually stabilize its business, but it could struggle to stand out in a crowded market favoring large players that can leverage economies of scale to maintain their pricing power.