Artificial intelligence (AI) and data company BigBear.ai (BBAI +0.24%) was on a roller-coaster ride over the past month. Shares surged on AI hype and news that AI chip leader Nvidia was buying stakes in emerging AI companies (it didn't buy a stake in BigBear.ai).
Unfortunately, those gains evaporated after an earnings report that fell short of Wall Street's expectations. That leaves investors at a crossroads, trying to decide whether BigBear.ai's rise was just a fluke or if the stock is due for a rebound.
While nobody can know for sure, there is evidence that investors should remain cautious. Here is why BigBear.ai could struggle to get back off the ground.
First, what does BigBear.ai do?
It's common for hot Wall Street topics to become buzzwords. AI is enjoying that level of hype, so knowing what these companies actually do is paramount to deciding which stocks to invest in. BigBear.ai is a data analytics company that uses AI to enhance organizational decision-making.
NYSE: BBAI
Key Data Points
Its primary focus areas include supply chain management, cybersecurity, autonomous systems, and government and military operations. The company has worked with the U.S. Department of Defense, Army, and Navy. Overall, BigBear.ai defines the government's contributions to its revenue as "significant." That's not necessarily bad; the government is a great customer, especially military-related business, which is a high priority in the federal budget.
Importantly, BigBear.ai isn't unique in what it offers. It competes with companies like Palantir and C3.ai. Both are larger than BigBear.ai, which has a $480 million market cap as of this writing.
The debt problem
You must be lean and mean when you're the small company in a ruthlessly competitive field like enterprise software. It's not a coincidence that Palantir and C3.ai have zero debt and significant cash piles to help them invest in growth. Unfortunately, BigBear.ai is loaded with $195 million in long-term debt, which dwarfs its $32 million cash pile.
Data by YCharts.
The company isn't profitable yet, but its cash burn is improving. The business reported $22 million of negative free cash flow in 2023, but that figure had shrunk to just negative $1 million by the fourth quarter. That should stop the financial bleeding, but it still handcuffs the company from dramatically investing in the business.
Can BigBear.ai compete over the long term?
BigBear.ai has no shot at outspending its competitors, so its technology must be so good it can win business anyway. It recently acquired Pangiam, a company specializing in facial recognition and image analysis. And as previously mentioned, it is winning contracts, especially with the military.
Management is also guiding for solid growth this year with 2024 revenue of $195 million to $215 million as the company integrates Pangiam. That's up to 39% growth over 2023. However, revenue was flat from 2022 to 2023, so is this growth sustainable once the Pangiam acquisition is baked in?
At the very least, BigBear.ai is a very speculative stock requiring investors to take a leap of faith based on its technology because there isn't much of a track record to stand on.
Meanwhile, a company like Palantir has deeper pockets and is profitable. Given its much larger market cap, is there as much upside in Palantir? Possibly not, but investing can be as much about avoiding losses as it is about chasing gains, and BigBear.ai would be lucky to eventually scale up into a company like Palantir. Investors are better off avoiding BigBear.ai and going for an AI business already walking the walk instead.
