BigBear.ai Surges on Comparisons to Palantir, But Is It an Investment Worth the Risk?

AI data mining and analytics firm BigBear.ai (NASDAQ:BBAI) recently experienced a considerable surge, skyrocketing 28% in response to favorable comparisons with industry giant Palantir Technologies (NYSE:PLTR). This rally has generated interest among investors, with reports from The Economic Times suggesting that despite BigBear’s classification as a small-cap tech stock, its business model closely resembles that of its larger rival, potentially leading to substantial returns in the near future. Better yet, BigBear has recently reported profitability and even secured a strategic partnership with Palantir aimed at integrating their technologies for corporate enterprise systems.

However, the following day, BBAI stock gave back 8% of its peak gains, prompting speculation among investors: Is now the appropriate time to join the enthusiasm surrounding AI stocks, particularly BigBear, as it aspires to reach new heights?

The Contract Hurdles

Both companies are vying for a stake in the burgeoning fields of artificial intelligence and machine learning, with a focus on cloud-based solutions. It is noteworthy that their collaborative partnership has existed for three years. Yet, thus far, it has not directly translated into significant operational improvements or contract wins for BigBear.

Contrastingly, the AI data analytics firm has achieved some success on its own, having recently been appointed as a subcontractor to Concept Solutions, which secured a $2.4 billion contract with the Federal Aviation Administration. Additionally, BigBear landed a substantial five-year, $165 million contract from the U.S. Army. However, a significant concern emerges from BigBear’s customer concentration: four clients accounted for over half (51%) of its revenue in the third quarter. The precarious nature of this concentration could result in a dramatic revenue drop if one of these contracts were to cease—for example, the loss of a previous Air Force contract or the bankruptcy of its once-major customer, Virgin Orbit.

Profitability vs. Revenue Realities

The initial enthusiasm surrounding BBAI’s partnership with Palantir has not demonstrated any tangible benefits in the latest filings with the Securities & Exchange Commission. What’s more, BigBear has an ongoing history of missing sales estimates. The most recent quarter was no different, with the company falling short of Wall Street’s expectations by 10%. It reported sales of $41.5 million against a consensus estimate of $46 million.

Furthermore, BigBear proactively adjusted its full-year revenue outlook downward: from an initial range of $195 million to $215 million, it has now revised its expectations to between $165 million and $180 million. This significant shift points to serious risks within its financial practices. For context, in the first three quarters of 2024, BigBear recorded sales of just $114.4 million, meaning it would need a hefty $50.6 million in sales to meet even the low end of its revised guidance—an accomplishment that has eluded them in the past.

When considering profitability, the discussion becomes more complicated. While BBAI has achieved profitability from an adjusted EBITDA standpoint, it has cumulatively accumulated $149 million in net losses this year, a stark contrast to the $39 million loss it recorded last year.

Key Takeaways

Although the recent rally in BigBear’s stock price generated buzz, it appears insufficiently grounded in solid financial fundamentals. The assertions regarding potential “massive returns” provided little to no substantiation, and they leaned heavily on tenuous ties to a much larger firm, rooted in outdated agreements that have yet to yield any real value.

This is not to dismiss BigBear as a potential competitor in an increasingly crowded AI analytics sector. Thus far, however, the company has not supplied convincing reasons for investors to jump onto the bandwagon. Following the rapid price escalation of its stock, it may be wise to consider locking in profits.

As for prospective investors contemplating an entry point, it might be prudent to maintain a cautious stance and await clarity on BigBear’s ability to deliver substantial, consistent growth before taking the plunge into this seemingly volatile stock.