With NVIDIA‘s (Nasdaq: NVDA) performance dominating business headlines every week, investors have been looking for under-the-radar AI plays that could have significant upside potential if the trend keeps accelerating in the years to come. One of the smallest companies in the space is BigBear.ai Holdings (NYSE: BBAI). Let’s take a look at what the company is and the bull and bear story behind the stock.

What Is BigBear.ai?

When you’re analyzing a company, one of the best places to start is going to their Investor Relations page and looking for a company presentation. In this respect, you can find a great overview on BigBear.ai from last August. Here are a few of the main highlights:

• What They Do: The company builds software for supply chain management and national security that uses artificial intelligence to sift through data and make predictive and actionable insights.
• Market Size: BigBear cites a total addressable market that’s projected to grow from $44.9 billion in 2021 to $128.9 billion in 2028.
• Customer Verticals: Their software is particularly attractive to the military and defense agencies. BigBear reports 20 customers in that industry alongside 160 commercial customers as of last August. One of their most important selling points is that Federal AI spending was forecasted to hit $1.3 billion in 2023 and $2.5 billion in 2024. Other verticals include autonomous systems, digital identity, cybersecurity, and supply chain and logistics. Non-government clients include healthcare systems like Seattle Children’s and Children’s Hospital Colorado, and Columbia Forest Products.

How Do Their Financials Look?

Revenue growth from BigBear has seen challenges in recent quarters. After growing at a clip of 15.8% in the first quarter of 2023, revenue has decelerated. In their most recent quarter, BigBear.ai saw -21.4% sales growth. That decline comes from the Air Force winding down a major program.

Net income in the past 12 months is a dreary -$159 million, which exceeds even the company’s revenue. Part of that comes from the impairment of goodwill. However, the company appears to be structurally unprofitable at these revenue levels. That is to say, revenue ($146 million) is far lower than combined cost of goods sold ($109 million) and operating expenses ($74 million). The situation may be improving as BigBear maintains 2024 revenue guidance of between $195 million and $215 million.

However, from a cash flow perspective, the burn isn’t as bad.

BigBear.ai has burned about $21 million in operating cash flow across the past year but managed to increase its overall cash position by $60 million after it issued $80 million in fresh shares. Overall, BigBear has $81 million in net cash and about $208 million in total debt.

What’s the Bull Case?

• The bull case for BigBear.ai is that government agencies are looking for more AI intelligence software. The gold standard in this space is Palantir (NYSE: PLTR), which for years has built a lucrative government business and is now focusing on commercial growth.
• While BigBear saw revenue decline by 21% in the first quarter, their full-year guidance calls for 32% revenue growth. Not all of this will be organic as the company has made acquisitions like Pangiam (more on this in a moment), but there’s likely some skepticism about BigBear’s ability to hit this target. So, if the company is able to build on momentum throughout the year, it’s like the company’s stock would be a winner across the next year.
• From a sales multiple perspective, BigBear.ai is cheaper than many other AI stocks. Among companies that are targeting similar customers (government and enterprise AI), Palantir trades for 20X sales while C3.ai (NYSE: AI) trades for more than 10 times sales. BigBear trades for about 2.5X sales, largely because of its lack of momentum. If the company can get sales growth back to levels that exceed expectations, you’d likely see this multiple re-rate to a higher level. Currently, Wall Street estimates call for $199 million in revenue in 2024 (below the midpoint of guidance) and $224 million in 2025.
• BigBear’s management is quite confident in its ability to expand digital identity. For example, they acquired a company named Pangiam that has inroads in airport security with contracts at the largest DC airports and Denver to expedite passenger processing.

What’s the Bear Case?

• As I noted earlier, while the company is projecting revenue of $195 to $215 million this year, that growth isn’t purely organic as the company is closing acquisitions. Results from February 29th onward this year will include Pangiam’s financial results. The midpoint of that guidance is also $205 million, which is above Wall Street’s average estimate of $199 million. Once again, this implies some skepticism the company can meet its goals.
• Looking ahead, while Wall Street has the company growing to $224 million in sales in 2025, profits prove elusive. Those same estimates call for -$31 million in net income. Wall Street estimates also call for deeply negative net income in 2026 and 2027. Perhaps more troubling is that cash flow from operations estimates are -$34 million in 2024, -$19 million in 2025, and -$12 million in 2026. If the company can’t produce positive operating cash flow, that raises the possibility of more dilution via secondary equity offerings.
• While the company has a story around artificial intelligence, other companies with AI in their name have failed to deliver stock returns. One example would be C3.ai, which hit more than $150 per share in 2021 and now trades for $24 per share. Just because a company has AI in its name doesn’t make it a winner.
• Finally, while the Federal government is increasing spending on AI, seeing growth from government contracts can prove elusive. They often start smaller, and the promise of a smaller initial contract turning into a bigger one doesn’t materialize. For example, right now BigBear is seeing slower sales growth as a contract it had been awarded was cancelled.

 

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