BigBear.ai (BBAI +5.67%) has become a leading artificial intelligence (AI) stock as investors gained enthusiasm for the company's AI data analytics services, driving the company's stock up 452% over the past three years. BigBear.ai sells its services to private companies and the U.S. government, and some investors may be hoping that the stock will follow the impressive gains that fellow AI data analytics company Palantir has experienced over the past several years.
But for all the enthusiasm, BigBear.ai has some significant drawbacks right now. Here are three problems with the company that I believe are big enough to currently disqualify it from being a good investment.
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1. Revenue is sliding
Young companies tapping into a fast-growing tech trend like AI -- and having a skyrocketing share price -- should be able to do at least one thing: generate rapidly accelerating revenue.
Unfortunately, BigBear.ai's sales aren't rapidly accelerating. Actually, they're not even growing right now. The company's second-quarter sales fell by 18% from the year-ago quarter to $32.5 million.
The decline in sales led BigBear.ai's management to lower its 2025 revenue guidance to $132.5 million, a sizable reduction from its previous sales guidance of $170 million, both at the midpoint.
And in case you're wondering if BigBear.ai's disappointing revenue is just a one-off issue, consider that the company also missed its 2024 sales guidance, with $158 million in reported sales compared to its low-end guidance of $165 million.
2. It's unprofitable and losses are widening
BigBear.ai isn't profitable, and the company is moving in the wrong direction for achieving that goal. In the second quarter, BigBear.ai had an adjusted loss of $8.5 million, on an earnings before interest, taxes, depreciation, and amortization (EBITDA) basis. Even more troubling, losses more than doubled from the year-ago quarter.
One of the reasons for the expanding losses was that BigBear.ai's research and development (R&D) costs increased by 23% to $4.3 million.
Making matters worse for BigBear.ai is the fact that its gross margin dropped to 25%, down from nearly 28% in the year-ago quarter. With losses expanding, R&D costs rising, and gross margin on the decline, there isn't much to be positive about for BigBear.ai's hopes of profitability.
NYSE: BBAI
Key Data Points
3. Its shares are expensive
Despite BigBear.ai's EBITDA losses widening and the company's revenue falling, its share price has soared over the past several years, rising 452%. That rapid increase means that BigBear.ai's price-to-sales ratio is now at 13. For reference, the average P/S ratio of the stocks in the S&P 500 is about 3.5.
Plenty of high-growth tech stocks look expensive and are still worth owning, so at face value, BigBear.ai's valuation isn't exactly problematic by itself. But when you consider that the company's sales are falling, losses are widening, margins are falling, and costs are increasing, investors should begin asking themselves, "What, exactly, am I paying such a premium for?"
Don't buy BigBear.ai stock right now
For all the reasons above, I think it's better for investors to avoid BigBear.ai stock right now. The company needs to prove it can return to strong revenue growth and start narrowing its losses before it's even worth consideration.
Shareholders have baked a lot of expectation into the stock, and that means if the company doesn't start reporting some impressive financial results, BigBear.ai's stock could fall hard as investors come to grips with disappointing growth.
