BigBear.ai (BBAI +1.01%) and SentinelOne (S +0.42%) represent two unique ways to invest in the growing artificial intelligence (AI) market. BigBear.ai develops modular data mining and analytics tools that can be plugged into edge networks. SentinelOne provides AI-powered cybersecurity tools that are aimed at replacing human analysts.
Those AI-driven technologies sound promising, but both stocks disappointed their early investors. BigBear.ai went public by merging with a special purpose acquisition company (SPAC) on Dec. 8, 2021. Its stock opened at $9.84 per share but now trades at about $1.50. SentinelOne went public via a traditional initial public offering (IPO) at $35 a share on June 30, 2021 but now trades at less than $20. Should investors buy either of these out-of-favor stocks as a turnaround play?
Image source: Getty Images.
What happened to BigBear.ai?
BigBear.ai, like many other SPAC-backed companies, made some grand promises before its merger but missed those estimates by a mile. This table illustrates the gap between its estimated and actual growth rates over the past three years.
|
Metric |
2021 |
2022 |
2023 |
|---|---|---|---|
|
Revenue (estimated) |
$182 million |
$277 million |
$388 million |
|
Revenue (actual) |
$146 million |
$155 million |
$155 million |
|
Gross margin (estimated) |
40% |
43% |
50% |
|
Gross margin (actual) |
23% |
28% |
26% |
Data source: BigBear.ai.
BigBear.ai blamed that slowdown on the macro headwinds and the bankruptcy of its major customer Virgin Orbit in 2023, but it also faces plenty of competition from similar start-ups and big tech companies like Salesforce. It's also suffering from severe customer concentration issues (49% of its revenue came from just three customers in 2023) and relies heavily on rigid fixed-price contracts that are poorly insulated from rising costs in an inflationary environment.
BigBear.ai's new CEO Mandy Long, who took the helm in October 2022, is trying to turn around the business in three ways:
- The company acquired the AI vision technology firm Pangiam this March to boost its near-term revenue.
- It won new government contracts.
- It cut costs to stabilize its adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) and cash flow.
NYSE: BBAI
Key Data Points
For 2024, analysts expect the company's revenue to rise 28% to $199 million (inorganically driven by its acquisition of Pangiam) as its adjusted EBITDA loss doubles to $6.4 million. But in 2025, they expect its revenue to grow 13% to $224.5 million as it generates a positive adjusted EBITDA of $8.6 million.
Based on those expectations and the company's enterprise value of $515 million, its stock looks cheap at less than three times this year's sales.
What happened to SentinelOne?
SentinelOne's revenue grew from fiscal 2021 to fiscal 2023 (which ended this January), representing a compound annual growth rate (CAGR) of 113%. But its revenue only rose 47% to $621 million in fiscal 2024 as its dollar-based net revenue retention rate declined, and it expects just 29%-31% growth to $800 million-$815 million in fiscal 2025.
That deceleration, which the company mainly blamed on the macro and competitive headwinds, spooked a lot of bulls who had grown accustomed to its triple-digit growth rates. Its lack of profits, even on an adjusted EBITDA basis, suggested it could be driven out of the market by bigger competitors like Palo Alto Networks and CrowdStrike. But despite that pressure, the company's adjusted gross and operating margins have consistently improved over the past four years.
|
Metric |
FY 2021 |
FY 2022 |
FY 2023 |
FY 2024 |
|---|---|---|---|---|
|
Adjusted gross margin |
58% |
63% |
72% |
77% |
|
Adjusted operating margin |
(107%) |
(85%) |
(49%) |
(19%) |
Data source: SentinelOne.
For fiscal 2025, SentinelOne expects its adjusted gross margin to expand to 78%-79% as its adjusted operating margin improves again to negative 2%-6%. Analysts expect it to narrow its adjusted EBITDA loss from $108 million to $21 million. For fiscal 2026, they expect its revenue to rise 26% as its adjusted EBITDA finally turns positive.
NYSE: S
Key Data Points
However, that slowdown also implies it will grow at a slower rate than CrowdStrike, the cloud-native leader that generated nearly five times as much revenue than SentinelOne with stable generally accepted accounting principles (GAAP) profits in its latest fiscal year. It's generally a red flag when the underdog is growing at a slower rate than the market leader. And with an enterprise value of $7.08 billion, SentinelOne still doesn't look like a bargain at seven times this year's sales.
The better buy: SentinelOne
I'm not a fan of either of these speculative companies right now, especially when plenty of better AI and cybersecurity stocks are still trading at reasonable valuations. But I'd pick SentinelOne as the better buy because its business is larger, margins are improving, and its disruptive focus on automating the entire threat-detection process with AI algorithms makes it a tempting takeover target for a larger tech or cybersecurity company.
