Is BigBear.ai Stock a Buy Now?

Key Points

• BigBear.ai was hampered by a slowdown in government spending last quarter.

• The company delivered a big increase in its backlog, but there is a catch.

• 10 stocks we like better than BigBear.ai ›

Shares of BigBear.ai (NYSE: BBAI) dropped like a rock following the release of the company's second-quarter results. It was easy to see why investors pressed the panic button after the report came out on Aug. 11: The company missed Wall Street's expectations by a mile and downgraded its guidance substantially.

BigBear.ai's stock price fell nearly 16% on the day following its earnings release. Let's see why this high-flying artificial intelligence (AI) company isn't in the good graces of investors anymore, and check if its sharp drop can be treated as a buying opportunity.

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Image source: Getty Images.

BigBear.ai's reliance on government contracts is weighing on the company

BigBear.ai's AI software platform is used by multiple U.S. government agencies, including border protection, defense and intelligence, and transportation. Though the company doesn't pinpoint exactly how much it is reliant on government contracts, it did say in its latest quarterly filing that the "majority of our revenue is derived from federal government contracts."

BigBear management added in the 10-Q filing that "U.S. government spending levels, particularly defense spending, and timely funding thereof can affect our financial performance over the short and long term."

This is precisely what happened last quarter. Revenue fell 18% from the year-ago period to $32.5 million, and that was well below the $40.6 million consensus estimate. Management said that the fall in revenue was a result of "lower volume on certain Army programs."

Specifically, the company was affected by the focus on cost efficiency by the Army last quarter, which disrupted its business. The adjusted loss per share was also bigger than expected. BigBear lost $0.71 per share last quarter as compared to a loss of $0.06 per share in the year-ago period.

However, the guidance was the bigger problem. Earlier, it was expecting a 7% increase in revenue in 2025. Its updated guidance of $125 million to $140 million now points toward a 16% drop at the midpoint when compared to its 2024 revenue. The positive takeaway from the latest quarterly report was a year-over-year jump of 43% in its backlog to $380 million.

But then, a closer look at the backlog tells us that the company may not be able to convert all of that into actual revenue. Just over 4% of BigBear's backlog last quarter was funded, which refers to the existing contracts for which funding has already been allocated.

What's more, nearly $279 million of its backlog was under the "priced, unexercised options" category. This refers to the "remaining contract value of goods and services to be delivered under existing contracts if our customer elects to exercise all of the options available in the contract."

So the backlog doesn't give us a true picture of its revenue growth potential, considering the caveats that apply to it. In all, the company's reliance on federal programs isn't exactly a positive for the stock right now.

The valuation points toward more downside

Analysts expect BigBear.ai to return to revenue growth in 2026. However, as the following chart shows, they have significantly reduced their growth expectations for next year.

Data by YCharts.

Things could turn out to be worse if the company's contracts don't pan out as expected. That's why buying BigBear.ai stock right now looks like a risky proposition because it trades at 11 times sales, a premium to the U.S. technology sector's average price-to-sales ratio of 8.8. The company's slowing growth trajectory doesn't justify that premium.

Assuming it does manage to achieve $150 million in revenue in 2026 and trades in line with the U.S. technology sector's average sales multiple, its market cap could drop to $1.3 billion. That points toward substantial downside from its current market cap of $2.3 billion.

Investors, therefore, would do well to look at other AI stocks right now that are not just cheap but are growing at a healthy pace, since BigBear.ai could continue remaining under pressure thanks to the points discussed above.

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Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.