BigBear.ai Holdings Shares Plunge. Is This a Buying Opportunity or a Red Flag?

Key Points

• BigBear.ai badly missed revenue expectations in Q2.

• The company now expects to report its lowest-ever yearly revenue as a public company.

• It does not show the characteristics of an AI software company.

• 10 stocks we like better than BigBear.ai ›

Share prices of BigBear.ai (NYSE: BBAI) plunged earlier this week after the analytics and systems integrator badly missed revenue and earnings expectations when it reported its second-quarter results. However, the stock is still trading up more than 300% over the past year, as of this writing.

The shares initially staged a big rally in early February after the company announced a contract win with the Department of Defense's (DoD) Chief Digital and Artificial Intelligence Office to design a Virtual Anticipation Network (VANE) prototype. This platform will use artificial intelligence (AI) models to analyze news media coming from potential U.S. adversaries.

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After a pullback following this strong early-year run, the stock rallied again to start the summer. A combination of overall strong AI sentiment, along with a few notable announcements -- such as a new strategic partnership in the United Arab Emirates and its participation in Project Convergence-Capstone 5 (PC-C5) -- helped power the stock ahead.

Let's take a closer look to see if the drop could be a buying opportunity, or if it's a warning to stay away.

Image source: Getty Images.

A big revenue miss for BigBear.ai

In Q2, BigBear.ai badly missed revenue expectations, as revenue sank 18% year over year to $32.5 million. That missed the $40.6 million analyst consensus, as compiled by S&P Global Market Intelligence.

The company blamed the miss on the federal government's efforts to reduce costs, saying that this disrupted contracts it has with the United States Army, which has been working to modernize its data architecture. Note, however, that this doesn't appear to have affected Palantir Technologies, which reported great results and recently signed a $10 billion, 10-year contract with the U.S. Army that consolidated 75 contracts into a single contract.

BigBear.ai said it "welcomes" this type of disruption, as it will lead to the Army using more software solutions to solve mission-critical problems. However, CEO Kevin McAleenan admitted that the company relies on too few large contracts and needs to broaden its customer base and the market it serves.

How much of a true software company BigBear.ai actually is, though, is questionable, as can be seen in its low gross margins. In the quarter, its gross margin fell to 25% from 27.8% a year ago. Those are just not software or AI gross margins. Because the company's engineers and data scientists must co-locate and be on-premises for many of its government projects, it has structurally low gross margins. Gross margins are important, as the higher they are, the easier it is to turn revenue into profits. In comparison, Palantir had a gross margin of nearly 81% in Q2.

On the profitability front, adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization) was a loss of $8.7 million, compared to a loss of $3.7 million a year ago. The decline came from lower revenue, reduced gross margin, and higher research and development expenses.

The company continued to burn cash in the quarter, but it took advantage of its high stock price to sell shares and solidify its balance sheet. It generated cash flow from operations of negative $3.9 million in the quarter and negative $7.1 million in the first half. However, after raising $293.4 million in proceeds from at-the-market (ATM) stock sales, it ended the quarter with $390.8 million in cash and equivalents and $103.1 million in debt.

Looking ahead, BigBear.ai reduced its full-year revenue forecast to be between $125 million and $140 million, down from a prior outlook of $160 million to $180 million. That would be a decline from the $158.2 million in revenue the company saw in 2024.

Should investors buy the dip or stay away?

BigBear.ai is simply not a software company riding the AI wave. It doesn't have the gross margins or predictable revenue stream of a software-as-a-service (SaaS) company. It also hasn't seen a big revenue lift from AI. In fact, its revenue this year is set to come in at the lowest level ever since the stock debuted in December 2021 through a SPAC.

While the stock has staged a big rally this year, its share count is also up nearly 50% in the past year. That's massive dilution.

The company has done nothing to deserve the big rally it's seen over the past year, and I think the sell-off in the stock was actually pretty tame given its results and guidance. While some investors may want to hope that BigBear.ai can turn into the next Palantir, that is just highly unlikely.

I think a lot more downside could be in store, and as such, I'd stay far away.

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Geoffrey Seiler has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Palantir Technologies and S&P Global. The Motley Fool has a disclosure policy.