BigBear.ai: Don't Chase This Meme Stock (Rating Downgrade)

seekingalpha04-13

BigBear.ai Holdings, Inc. stock is overvalued and is likely to raise funds by diluting investors in the next twelve months.The company's revenue growth rates have been volatile, and its acquisition of...

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J Studios Investment Thesis BigBear.ai Holdings, Inc. (NYSE:BBAI), which provides advanced analytics solutions and AI, is overvalued. To further confound matters, I believe that in the next twelve months, BigBair.ai will be forced to raise funds by diluting investors. Ultimately, I contend that over the next few quarters, investors will look back to BBAI at $1.76 as a high share price. Here I discuss what BigBear.ai does and why I believe this stock is a sell. Rapid Recap Back in September, I said:  BigBear.ai is a business that has a mighty compelling narrative. Indeed, I have to admit that even though I had my doubts about the business, I didn't put a sell rating on the stock.   Author's work on BBAI  I recognized that putting a sell rating on an artificial intelligence, or AI, stock, particularly with one that has AI in its name, isn't worth the trouble unless I'm thoroughly convinced that the stock is heading lower. In hindsight, this was the right call to make. But now, as we look ahead to 2024-2025, I believe that this stock is a sell. Here's why. BigBear.ai's Near-Term Prospects BigBear.ai specializes in AI-powered decision intelligence solutions, serving markets like global supply chains & logistics, autonomous systems, and cybersecurity. They are not an asset-light platform, but rather, a management consulting service, focusing on areas such as cloud engineering. And this will, needless to say, impact the premium its stock should trade at. Their solutions empower clients, including federal defense and intelligence agencies, to make informed decisions by processing complex data. Simply put, BigBear.ai's competitive advantage lies in its team of experts, not in its software solutions. Along these lines, BigBear.ai faces some key, noteworthy challenges. One key challenge revolves around the impact of contracts like EPASS, which represent legacy programs with lower margins. Also, the bankruptcy of Virgin Orbit presents a significant headwind, resulting in a loss of revenue. On a positive note, BigBear.ai acknowledges these headwinds and is striving to achieve positive cash flow while navigating non-recurring expenses. Given this context, let's delve deeper into its fundamentals. Revenue Growth Rates Are Unpredictable BBAI revenue growth rates The graphic above shows the volatile revenue growth rates that BigBear.ai has delivered in the past several quarters. A lot could be said about BigBear.ai. But what cannot be said is that this is a stable, predictable, recurring business model with high growth. What's more, to further complicate its growth profile, BigBear.ai acquired Pangiam but has failed to break out what its organic growth rates for 2024 are likely to be. Instead, we are left with its revenue growth rates pointing to 40% growth rates, but light on detail as to the underlying drivers of this growth rate. BBAI Stock Valuation -- Overvalued BigBear.ai's balance sheet holds approximately $160 million of net debt. Put another way, more than a third of its market cap is made up of its net debt position. Furthermore, even though BigBear.ai was free cash flow positive in Q3 2023, this free cash flow wasn't strong enough to stop BigBear.ai from being substantially free cash flow negative for 2023. More specifically, BigBear.ai burnt through just over $20 million of free cash flow last year. Even if we presume that 2024 sees its free cash flow improve slightly, I believe that this company is bound to raise capital in the next twelve months. Consequently, BigBear.ai will do everything in its power to put together a strong Q1 (expected May 8th), together with a super-polished AI-driven narrative, so that they can raise further funds this year, after raising $50 million last year. Moreover, BigBear.ai is not a high gross margin software business. Indeed, its gross margins stood at 32.1% in Q4 2023, which, although this was an improvement from the 29.2% in the prior year, it's hardly commensurate with a pure-play AI opportunity. This is a low-margin tech business with very choppy growth rates. Avoid this stock. The Bottom Line As an investor, I recommend avoiding BigBear.ai. The company's overvaluation is confounded by the high likelihood of fund-raising activities in the next 12 months, which will dilute investors. Moreover, BigBear.ai's revenue growth rates have been volatile, and its acquisition of Pangiam lacks transparency regarding organic growth projections for 2024. The company's balance sheet reflects substantial net debt, raising concerns about its financial stability. Although BigBear.ai aims to improve its cash flow, its low gross margins and unpredictable growth rates underscore the risks associated with investing in this stock.  Therefore, I now issue a sell rating on BigBear.ai Holdings, Inc. stock.","kind":null,"is_publish_news":null,"is_publish_highlight":null,"is_publish_live":null,"is_publish_wemedia":null,"editions":null,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":1,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.22.4","shortVersion":"4.22.4","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2427788768"}