AI data mining and analytics firm BigBear.ai Holdings (NASDAQ:BBAI) rocketed 28% higher after it was compared favorably to industry giant Palantir Technologies (NYSE:PLTR).
The Economic Times cited “reports” that although BigBear was a small-cap tech stock, because its business is similar to its larger rival it could generate “massive returns this year, as well as the next.” It noted BigBear recently turned profitable and it even has a strategic partnership with Palantir to integrate their products for use in corporate enterprise systems.
While BBAI stock gave back 8% of its prior gains yesterday, is now the time for investors to climb about the AI stock in preparation for it going stratospheric?
24/7 Wall St. Insights:
- BigBear.ai Holdings (BBAI) surged 28% in one day after it was cited as being the next Palantir Technologies (PLTR).
- Reports indicated BBAI stock could score investors “massive returns” over the next two years, mentioning a strategic partnership with its peer.
- Investors should use caution, though, as the agreement is old and there were few concrete facts offered on what could trigger a big run-up in the stock.
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A small fish in a big pond
Both BigBear.ai and Palantir Technologies are targeting the artificial intelligence and machine learning cloud-based markets and it’s true there is an ongoing partnership between the two companies. However, that agreement was signed three years ago and it has yet to achieve any noticeable contract wins or operational improvements for BigBear.
Now the AI data analytics shop has scored a few wins on its own. It was named a subcontractor to IT company Concept Solutions, which won a $2.4 billion Federal Aviation Administration contract, and it got a five-year $165 million contract from the U.S. Army.
The problem for BigBear is it has only a handful of customers that represent the bulk of its revenue. In the third quarter, just four customers accounted for 51% of its revenue. Part of the reason BBAI stock has lost half its value from its 52-week high is this customer concentration. The loss of any one contract could be devastating to the firm, such as when an Air Force contract ended and one of its biggest customers, Virgin Orbit, went bankrupt.
Its Palantir partnership hasn’t done anything for BigBear and its bigger rival doesn’t even earn a mention in its latest Securities & Exchange Commission filings.
A history of big misses
Government contracts are notably lumpy and arbitrary. It was one of the reasons Palantir Technologies branched out into the enterprise market. Revenue streams are far smoother and more sustainable than seeking out contracts subject to the whims of politicians.
And BigBear.ai has very little visibility into its own business. The AI shop has missed sales expectations every year as a public company. Last quarter was no exception, missing Wall Street revenue forecasts by 10%, posting sales of $41.5 million versus the consensus estimate of $46 million.
Moreover, at the end of the first quarter, BigBear guided full-year revenue to a range of $195 million to $215 million, but has since cut that outlook to $165 million to $180 million. Through the first three quarters of 2024, it has generated sales of $114.4 million, meaning to hit the low end of its guidance, it would need some $50.6 million in sales, something it has never achieved. It will need sales to jump almost 25% from last year to hit that mark.
And that profitability that was mentioned in the article was only on an adjusted EBITDA basis. Year-to-date it has $149 million in net losses, far worse than the $39 million loss it posted last year.
Key takeaways
The rally in BigBear.ai’s stock was not grounded on any fundamental basis for the company’s growth, offered no substantiation on why BBAI could generate “massive” returns for investors, and only offered tenuous connections to bigger, better run businesses sourced from stale agreements that failed to produce any substantive value.
All that’s not to say BigBear.ai is not a business that could one day become a competitive player in an increasingly crowded AI data analytics industry. Yet so far it has not shown any reason why investors should jump on board the rally wagon.
After the brief surge in its stock, I’d recommend locking in any profits. For other investors trying to decide whether to pull the trigger, stay on the sidelines until BBAI stock proves it is worth the elevated price point.
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