Why BigBear.ai Holdings Stock Was Racing Higher This Week

Artificial intelligence (AI) stocks have been wobbly lately; fortunately for BigBear.ai Holdings (NYSE: BBAI), this volatility resulted in a share price rise over the week. According to data compiled by S&P Global Market Intelligence, the shares were trading nearly 9% higher week to date near Friday's market close.

Manic Monday

The key trading session within that stretch of time was Monday, when BigBear.ai both announced a new acquisition and reported its third-quarter earnings.

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The company has signed a definitive agreement to acquire peer Ask Sage. This is a privately held AI company with a sharp focus on highly regulated businesses, such as defense companies and organizations tasked with national security duties. The price is $250 million.

As for the third-quarter performance, BigBear.ai's revenue declined by 20% year over year to just over $33 million. It attributed the fall to reduced volume in certain programs with the U.S. Army; it did not provide more specific details. On a brighter note, the company's net loss per share for the period narrowed considerably across that one-year span, to $0.03 from $0.06.

Another positive factor was that both metrics beat consensus analyst estimates.

A growing but pricey sector

On the back of these two developments, investors were very bullish on BigBear.ai, and eagerly snapped up the stock in the first part of the week. Toward the weekend, however, there was a significant pullback, largely due to growing concern that many AI stocks are uncomfortably expensive relative to their valuations.

I think Ask Sage is a smart and opportunistic acquisition, particularly given the buyer's assertion that the company is on track to more than quadruple its annual recurring revenue (to around $25 million this year).

That said, those investor concerns are valid for an AI sector that's getting awfully crowded with companies that haven't yet proven their long-term viability despite the whiz-bang technology. In BigBear.ai's case, this concern is acute, given the significant year-over-year decline in third-quarter revenue. I'd be cautious with this stock and other AI pure-plays right now.

Eric Volkman 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.