Is BigBear.ai Stock a Buy Now?

BigBear.ai (NYSE: BBAI), a developer of AI-oriented analytics tools, went public three years go by merging with a special purpose acquisition company (SPAC). The combined company's stock started trading at $9.84 a share, closed at a record high of $12.69 on April 13, 2022, but sank below $1 by the end of the year.

Like many other SPAC-backed start-ups, BigBear.ai overpromised and underdelivered. Rising interest rates exacerbated that pressure by driving investors away from speculative and unprofitable companies.

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But today, the stock trades at about $4 -- so investors who took the contrarian view at its all-time lows two years ago are sitting on some big gains. Let's see why this volatile stock bounced back, and if it's still worth buying today.

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An underdog in the enterprise AI market

BigBear.ai's data mining and analytics tools are used to collect data from myriad sources to help its clients make faster and more informed decisions. That AI-oriented market is a crowded one, but BigBear.ai stands out from the competition in two ways.

First, it mainly runs its services on edge networks instead of core networks. Second, it provides its services as stand-alone modules that can be plugged into an organization's existing software infrastructure. That flexible and scalable approach might make it an appealing alternative to bigger and stickier cloud-based platforms.

During its pre-merger presentation, BigBear.ai claimed it could grow its revenue from $182 million in 2021 to $388 million in 2023. But in reality, its revenue only reached $146 million in 2021, $155 million in 2022, and flatlined at $155 million in 2023. It posted a gross margin of just 26% in 2023, compared to its original target of 50%.

BigBear.ai blamed that slowdown on macro headwinds, competition, and the bankruptcy of its major customer Virgin Orbit in 2023. Yet it struggled to explain how it would overcome those major challenges, and its investors headed for the exits.

What's next for BigBear.ai?

CEO Reggie Brothers stepped down in October 2022 and handed the reins over to former IBM executive Mandy Long. Under Long, BigBear.ai executed an all-stock takeover of the AI vision technology company Pangiam and secured new government contracts to grow its revenue. It also aggressively cut costs to bring its adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) and cash flows back to positive levels in the second half of 2023.

For 2024, BigBear.ai expects its revenue to grow 6% to 16%, for a range of $165 million to $180 million. Analysts expect its revenue to rise 8% to $168.3 million as its adjusted EBITDA approaches break-even levels. For 2025, they expect its revenue to rise 14% to $192.5 million with a positive adjusted EBITDA of $4.8 million.

That growth should be driven by its government deals -- including a five-year $165 million contract with the U.S. Army and a new project with the Federal Aviation Administration -- and its data-sharing partnerships with bigger platforms like Amazon Web Services and Palantir Technologies. It could also expand Pangiam's presence in the nascent AI vision market.

But is it the right time to buy BigBear.ai's stock?

BigBear.ai increased its share count by 85% since its SPAC merger. That dilution was mainly caused by its all-stock takeover of Pangiam, its stock-based compensation, and new stock offerings. But with $65.6 million in cash and equivalents at the end of its latest quarter, it probably won't go bankrupt before its adjusted EBITDA turns positive.

But with an enterprise value of $1.35 billion, BigBear.ai isn't a screaming bargain at 7 times next year's sales. That might be why insiders sold more than 80.5 million shares over the past three months but didn't buy a single share.

BigBear.ai has had a great run since its penny stock lows, but it's easy to find higher-growth tech stocks that are trading at more attractive valuations. So for now, I wouldn't buy the stock unless it proves its business model is sustainable.

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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Leo Sun has positions in Amazon. The Motley Fool has positions in and recommends Amazon and Palantir Technologies. The Motley Fool recommends International Business Machines. The Motley Fool has a disclosure policy.