BigBear.ai Stock Could Soar to $7, According to a Wall Street Analyst. Is It a Buy at Around $5 Per Share?

Last year was a wild ride for folks holding shares of BigBear.ai (NYSE: BBAI) stock. Unbridled enthusiasm for the artificial intelligence (AI) industry drove it through the roof last March, but the stock fell hard from its peak.

Shares of BigBear.ai didn't stay down long. The stock shot 229% higher between the end of September and Dec. 30, 2024.

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And investment bank analysts think there's more fuel in this AI stock's tank. The latest Wall Street endorsement came from H.C. Wainwright's Scott Buck. Spurred by increasing demand for AI-related services across multiple sectors, Buck raised his price target on the stock to $7 per share, which implies a 46% gain from the stock's closing price on Dec. 30.

Before you get excited and load up on this volatile stock, it's important to remember analysts have nothing to lose but their reputation if things don't work out. Let's weigh recent signs of encouragement from BigBear.ai against some reasons to be cautious about this stock to see if it deserves a place in your portfolio now.

Why Wall Street is bullish for BigBear.ai

This beneficiary of the AI gold rush develops data mining and analytics tools that can tap into and integrate a variety of sources. Clients with a footprint in diverse industries, including national security, digital identity, and supply chain management, hire BigBear.ai to help make informed decisions on the go.

The AI-powered data analytics space is increasingly crowded, but the company differentiates itself from the pack by providing services as smaller modules that clients can add to the software infrastructure they already own.

In addition to employing smaller modules, BigBear.ai provides services on edge networks to reduce latency. A combination of edge networking and smaller modules helped it sign some important deals recently.

In October, the new CEO BigBear.ai appointed this year, Mandy Long, announced a five-year contract with the U.S. Army worth $165 million. To put the size of this deal in perspective, total revenue reached just $155 million in 2023.

Recently, BigBear.ai told investors its biometric verification solution, veriScan, was up and running at the Denver International Airport's departure gates.

Reasons to avoid BigBear.ai stock for now

Visibility is a bit of a problem for BigBear.ai and its data analytics-providing peers. Last March, the company told investors to expect total revenue to reach a range between $195 million and $215 million in 2024. It has since lowered its revenue guidance to a range between $165 million and $180 million.

BigBear.ai is in a fast-growing industry, but its business is creeping forward at a snail's pace. The midpoint of management's revenue guidance range for 2024 is only 11% above the total revenue the company reported in 2022.

BBAI Revenue (TTM) data by YCharts

Slow growth isn't much of a problem for an established business with profits, but BigBear.ai is bleeding money. It finished September with just $65.6 million in cash, after burning through $149 million in the first nine months of 2024.

Gross margin from the first nine months of 2024 rose to $28.8 million, which isn't nearly enough to meet expenses. Interest expenses of $10.6 million chewed up more than one-third of the gross profit it generated in the period.

The impairment of an intangible asset was responsible for an $85 million loss that won't recur. Even if we factor in the nonrecurring loss, this business is losing money so quickly that it will likely need more capital by the end of 2025. With a lot of debt already on its books, a dilutive secondary offering could be in the cards next year.

A buy now?

There's a chance the developments BigBear.ai reported after the close of the third quarter will allow operations to start breaking even in 2025. Given the financial performance we've seen from this business over the past two years though, expecting sustainable profits in the foreseeable future seems like wishful thinking.

Competition in this software provider's industry is rapidly intensifying. Even if you have a high tolerance for risk, it's probably best to wait until this business starts reporting sustainable profits before buying any shares.

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Cory Renauer has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.