Shares of BigBear.ai (BBAI) have been treading water since a less-than-stellar first-quarter update was released last month. The stock trades down nearly 34% so far in 2024 with the market impatient over the ability of this artificial intelligence (AI) specialist to deliver a breakout moment.
Still, there's plenty for investors to get excited about from this company that provides decision intelligence solutions for national security, digital identity, supply chains, and logistics companies. The company continues to pursue opportunities in machine learning and computer vision.
On the other hand, it's also operating under the shadow of recurring losses and large debt. Because of that, it's a stock that should warrant caution.
So is BigBear.ai stock a buy, sell, or hold today? Here's what you need to know.
Mixed financial signals at the start of 2024
The headline news from BigBear.ai's latest quarterly report wasn't very inspiring. Revenue of $33.1 million declined by 21.4% year over year, while the gross margin of 21.1% was down from 24.2% in the prior-year quarter.
Some context here is important. The completion of a contract with the U.S. Air Force last year left a tough base of comparison and was the main culprit in the sales decline. The company also lost business as its former customer Virgin Orbit declared bankruptcy in early 2023. Factoring out those issues, the current trends are a bit better than what the numbers might suggest.
The company is making some progress in its efforts to get its losses under control. The focus has been to operate more effectively by reducing expenses while creating synergies across different business units. Selling, general, and administrative costs were $16.9 million compared to $20.4 million in the first quarter of 2023. The adjusted loss of $1.6 million in earnings before interest, taxes, depreciation, and amortization (EBITDA) narrowed from the $3.8 million loss in the period last year.
Profitability remains elusive, but the company is getting closer to break-even adjusted EBITDA as a first step to a more sustainable business model in 2025 and beyond.
The growth story is still intact
BigBear.ai management remains confident that growth will rebound in a stronger second half of the year. Management reaffirmed its full-year revenue guidance of between $195 million and $215 million, with the midpoint representing an increase of 32% from 2023.
The key development this year has been the February acquisition of Pangiam, a leader in biometric and identity-management software. The deal leverages BigBear.ai's vision technology with a software platform that is gaining adoption at high-traffic facilities.
Pangiam has several contracts this year for its VeriScan and Linkware platforms with major airports and other port authorities to facilitate passenger processing. These are camera-based facial recognition systems that capture and transmit real-time images for identity verification and threat detection.
Image source: Getty Images.
Another important area is the supply-chain industry where companies can benefit from BigBear.ai's ProModel simulation software to reduce costs and increase efficiency. The latest update is an agreement with the consulting firm Spinnaker SCA to incorporate ProModel.
This new round of operating momentum offers a path for BigBear.ai to accelerate its push toward commercial markets as a new growth driver.
Room to stay cautious
The main concern when looking at BigBear.ai is that the company will need to begin addressing its $208 million in total debt against $81 million of cash on the balance sheet. This is not necessarily a problem today but could become a bigger issue without a growth rebound.
The risk is that potentially dilutive financing such as a secondary share offering will be required to provide liquidity in the next few years. With an outlook for ongoing losses and negative operating cash flow for the foreseeable future, shares should remain volatile.
Balancing the positives and negatives from BigBear.ai, I believe the stock is a hold at the current level. A wait-and-see approach before buying shares makes sense with 2024 being crucial for the company to confirm its business strategy can work.
