When BigBear.ai (NYSE: BBAI) went public by merging with a special purpose acquisition company (SPAC) in December 2021, it bore a striking resemblance to Palantir Technologies (NYSE: PLTR), which went public through a direct listing in September 2020.
Both analytics companies helped government and enterprise customers aggregate data from disparate sources to make smarter decisions. BigBear.ai even integrated Palantir’s tools into its own modules before its public debut.
BigBear.ai’s stock now trades at about $2, roughly 80% below its opening price of $9.84 after it closed its merger. Palantir trades at about $25, which marks an impressive 150% gain from its opening price of $10 on the first day.
Let’s see why BigBear.ai didn’t follow Palantir’s gains — and if it has a shot at a long-term comeback.
How BigBear.ai is different from Palantir
BigBear.ai differs from Palantir in three key ways. First, it provides its data mining services as standalone modules that can be integrated into an organization’s existing software. Palantir provides its services through two main platforms: Gotham for government customers and Foundry for commercial customers.
Second, BigBear.ai is smaller than Palantir. In 2023, it generated only $155 million in revenue as Palantir brought in $2.23 billion in revenue. It’s also grown at a slower rate than Palantir since its public debut.
Lastly, BigBear.ai is still deeply unprofitable on a generally accepted accounting principles (GAAP) basis, yet Palantir has generated GAAP profits for the past five consecutive quarters. Generally speaking, it’s a bright red flag when an underdog is growing at a slower pace and bleeding more red ink than its larger industry peers.
Why did BigBear.ai disappoint the market?
Like many of its SPAC-backed peers, BigBear.ai set overly bullish long-term estimates but missed its own expectations by a mile. Before its merger, it claimed it could grow its revenue at a compound annual growth rate of 40% from $140 million in 2020 to $388 million, expand its annual gross margin from 30% to 50%, and keep its margin on the basis of adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) in the high teens. But here’s what actually happened.
|
Metric |
2020 |
2021 |
2022 |
2023 |
|---|---|---|---|---|
|
Revenue (millions) |
$140 |
$146 |
$155 |
$155 |
|
Revenue growth |
15% |
4% |
6% |
0% |
|
Gross margin |
30% |
23% |
28% |
26% |
|
Adjusted EBITDA margin |
18% |
3% |
(11%) |
(2%) |
Data source: BigBear.ai.
BigBear.ai mainly blamed its slowdown on the macro headwinds, slower government spending, and the bankruptcy of its major customer, Virgin Orbit. That’s why it wasn’t too surprising when CEO Reggie Brothers resigned in October 2022.
His successor, Mandy Long, pivoted the company toward cutting costs and right-sizing its business. As a result, its adjusted EBITDA margins and cash flow turned positive in the second half of 2023. It also recently acquired the near-field vision AI technology developer Pangiam to boost its revenue — but that all-stock deal will dilute its existing shares.
In its fourth-quarter shareholder letter, Long admitted the company “had to do the hard work to get our house in order” throughout 2023 as it overhauled its operating structure, wound down its lower-value contracts, reset its strategic priorities, and navigated a “volatile macroeconomic and geopolitical environment.”
Long expects BigBear.ai’s revenue to rise 26%-39% in 2024, but most of that growth will be inorganically driven by its purchase of Pangiam. Analysts expect its revenue to grow 31% in 2024 but rise just 12% in 2025 after it laps that acquisition. It still faces a lot of unpredictable challenges, but its stock isn’t expensive at about 3 times this year’s sales.
BigBear.ai probably won’t become the next Palantir
Palantir’s revenue rose 17% in 2023, and analysts anticipate 22% growth in 2024 and 19% growth in 2025. Most of that expansion should be organic, and the company expects to remain profitable on a GAAP basis for the foreseeable future.
Palantir’s growth could also curb the appeal of stand-alone modular service providers like BigBear.ai. It seems unlikely that BigBear.ai will ever become as big as Palantir — which aspires to become the “default operating system for data across the U.S. government” — but it might carve out its own niche or attract a takeover bid from a bigger company. Neverthless, BigBear.ai’s stock probably won’t recover from its disastrous decline until it makes some drastic improvements.
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Leo Sun has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Palantir Technologies. The Motley Fool has a disclosure policy.
Could BigBear.ai Become the Next Palantir? was originally published by The Motley Fool
