BigBear.ai (BBAI 6.43%) stock has attracted attention as a potentially explosive play in the defense artificial intelligence (AI) space. With the stock trading at under $7 per share as of this writing, BigBear.ai's low pure-dollar price has also inspired hopes for a potentially massive valuation run.
Bulls have pointed to the incredible success of Palantir (PLTR 0.17%) as a model for how BigBear.ai's stock trajectory could play out. But instead of investing in BigBear.ai in hopes of scoring a Palantir-like run, I think long-term investors will be much better served by simply investing in Palantir.
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Palantir is risky but still looks like a better buy than BigBear.ai
BigBear.ai is currently valued at approximately 22 times this year's expected sales. Meanwhile, Palantir trades at a whopping 101 times this year's projected forward revenue.
Sporting a highly growth-dependent price-to-sales multiple and trading at 258 times this year's expected adjusted earnings, Palantir is definitely a high-risk stock that carries an extremely growth-dependent valuation. On the other hand, the company has a stellar margin picture -- and its forefront position in artificial intelligence software still leaves the door open for a massive for long-term expansion.
NASDAQ: PLTR
Key Data Points
Despite a very favorable backdrop for defense AI spending, BigBear.ai's sales have collapsed recently. Revenue declined 20% year over year to land at $33.1 million in the third quarter, and the business posted a gross margin of just 22.4% in the period. For a business focused on software and services, BigBear.ai's gross margin is alarmingly low.
For comparison, Palantir's overall revenue surged 63% higher year over year to reach $1.18 billion. Meanwhile, Palantir's sales to U.S. government customers grew 52% year over year to reach $486 million and the company posted a gross margin north of 82% last quarter amid rapid business expansion.
While defense AI spending trends will create favorable backdrops for multiple companies, BigBear.ai is also competing with Palantir. Thus far, there's not much evidence that the smaller defense AI player has been delivering new tech and service capabilities that key military customers view as essential for next-gen defense initiatives.
BigBear.ai hasn't been successful in delivering revenue growth through the signing of new contracts with government customers lately. The company's acquisition of Ask Sage has given some investors hope that the integration will pave the way for more government contract wins and new momentum in the private sector, but it's a risky bet.
Meanwhile, Palantir has been one of the biggest winners in the artificial intelligence market -- and its wins have stemmed from real performance advantages offered by its technologies. In the intensely competitive defense-AI space, Palantir stock continues to look like a better buy than BigBear.
