BigBear.ai (BBAI 7.53%) has been on an absolute tear lately, with the stock rising around 90% in under a month. This brought its stock price up to the mid-$7 range, but could the stock move even higher to $20?
That would essentially indicate the stock could triple from here. But is that a realistic expectation, or is it just a pie-in-the-sky figure that investors can only hope happens?
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BigBear.ai's stock could be heavily influenced by a few contract wins or losses
While BigBear.ai investors may hope that the stock reaches $20, hope isn't an investing strategy. Instead, investors should focus on what it would take for the stock to reach $20 per share and back-calculate whether that's a realistic expectation or not.
BigBear.ai provides AI services to numerous entities, with a primary focus on the government. Although BigBear.ai isn't a young company by any means (it was founded in 1988), its revenue stream suggests that it's still a fledgling AI company seeking relevance.
BigBear.ai derives a significant amount of its revenue from just a handful of clients. This is a tell-tale sign of a company that's just getting started with expansion, as it hasn't won a large number of contracts. In 2024, four clients accounted for 52% of revenue. If one (or even two) of these major clients decided to leave, it could spell disaster for BigBear.ai's business. This is exactly what happened with one client, as a single customer accounted for 19% of revenue in 2022, then 9% in 2023, before the relationship was terminated in 2024. Fortunately for BigBear.ai, they replaced this lost business with another client that accounted for 11% of revenue in 2024.
This all underscores a significant tipping point for BigBear.ai -- if it loses its largest clients, the stock could plummet. On the other hand, if it signs a few more large contracts with new clients, the stock could surge.
It's impossible to predict the future, which is why there's a ton of risk associated with BigBear.ai, as the stock could head in either direction at a moment's notice.
If it loses some of its major clients, the stock isn't headed to $20; it could drop to $2. But if BigBear.ai wins some big contracts, what would it take to hit $20?
BigBear.ai's stock isn't as cheap as you may think
At first glance, BigBear.ai's valuation may seem cheap at 11.5 times sales, especially when you consider that most software companies trade between 10 and 20 times sales.
BBAI PS Ratio data by YCharts
However, there's a huge caveat to that range that was given. That assumes that the company can deliver typical software-level gross margins of about 80%. This high margin allows for potentially huge profit margins down the road, often ending up around the 30% mark.
BigBear.ai isn't a typical software company, as it's heavily focused on providing services to its clients. This isn't as high a margin business as pure software sales, and is why BigBear.ai has a much lower gross margin than its peers.
BBAI Gross Profit Margin (Quarterly) data by YCharts
BigBear.AI will likely never achieve the same profit margins as other software companies due to the high cost of revenue associated with its product. This suggests to me that the stock is actually very expensive at 11.5 times sales, and investors should exercise caution here.
Even if BigBear.ai's revenue doubles, the stock would appear pricey unless its gross margins improve dramatically alongside that growth. Currently, BigBear.ai's growth isn't anywhere near doubling; it's barely keeping up with the rate of inflation. During Q1, BigBear.ai's revenue increased 5% year over year, while Wall Street analysts project a 6% growth rate for FY 2025.
BigBear.ai could secure some significant contract wins to boost this figure, but it could also lose clients just as easily. As a result, I need to see a lot more business performance before I feel comfortable recommending BigBear.ai. There are far too many excellent AI stocks out there to invest in a high-risk stock like BigBear.ai, and I think investors should consider those stocks first.
