BigBear.ai (NYSE: BBAI) has big aspirations, but how quickly can it become a billion-dollar enterprise? The company has promising growth opportunities, but recent results have been mixed. BigBear's $360 million market cap needs to triple to hit the billion threshold, but what needs to happen to get it there?
BigBear operates in a competitive, high-growth industry
BigBear is an AI software company that provides decision intelligence solutions that assist critical functions in multiple industries. These functions include identity verification, supply chain analysis, demand forecasting, product development, and event detection. That's jargon-heavy, but it means its suite of software products is a valuable resource for a variety of customers.
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BigBear gained traction in the corporate logistics space by assisting businesses with managing their labor force, material purchasing, and manufacturing output. Its digital identification services include facial recognition and advanced biometric analysis, which are useful in numerous security applications. It has been instrumental for life science customers by aiding the research, development, and testing of new products. Healthcare providers use the software to optimize facility workflows and care delivery settings.
BigBear allows a variety of organizations to offer better services to their customers and minimize unnecessary expenses. It also provides professional services to support the implementation and maintenance of its solutions. That's a strong value proposition.
AI software is in the early stages of a boom period with explosive growth. Automation is likely to transform the world over the next few decades, and the leading vendors should reap the financial rewards. The space is already highly competitive, with tech giants and a swarm of innovative start-ups looking to meet surging demand with new products. As it stands, BigBear has a tiny foothold, but it has the potential to deliver huge gains if it manages to carve out a spot for itself in the market.
What do BigBear's financial results indicate?
BigBear reported revenue of $33 million in its most recent quarter, which was down more than 20% from the first quarter of 2023. Lower sales were attributed to the loss of two large customers. One was the planned conclusion of a contract with a government defense agency, and the other was a customer that went bankrupt.
Losing big customers poses a significant challenge, but better days are ahead. Bigbear's full-year forecast calls for approximately $200 million in sales, suggesting revenue acceleration. The recent acquisition of Pangiam accounts for a significant portion of that increase, but the forecast also implies new customer contributions.
BigBear reported $125 million in quarterly net losses, much of which was attributable to non-cash expenses, such as equity-based compensation and goodwill expenses related to acquisition activity. The company burned less than $15 million of actual cash last quarter, and its adjusted operating profits were nearly at breakeven. Accounting profits are relevant but don't get fooled into thinking that the company is actually losing over $100 million each quarter.
BigBear has over $80 million in cash on its balance sheet, with an additional $36 million of accounts receivable, representing cash that should be collected relatively soon. The company likely needs to raise additional capital, but it has some runway to continue operating the growing business with its current liquidity. Raising capital means that existing shareholders will be diluted or the company will incur interest expense after issuing debt. In both cases, existing shareholders will be entitled to lower potential future cash flows than if the financing never occurred, holding all else equal.
That comes with the territory for high-growth businesses in a burn phase. Venture capital supports promising companies through that phase in exchange for a much more valuable stake down the road. This isn't a bad investment approach, but it does carry risk.
Connecting fundamentals to valuation
Equity valuation is often based on profits or cash flows, so it can be difficult to determine the value of a business in the burn phase. In most of these cases, investors tie share price to a multiple of annual sales. For example, C3.ai (NYSE: AI) has a price-to-sales ratio above 10, though it has fluctuated from below 5 to nearly 20 in recent years. BigBear's price-to-sales ratio has been much lower, and it's currently 1.6.
BBAI PS Ratio data by YCharts
BigBear is a relatively new competitor that's delivered mixed financial results, so it's justifiably priced at a discount to other AI stocks. There's also the near-certainty of additional financing, contributing to the lower valuation.
It's hard to say exactly what valuation multiples the market will attach to BigBear in the future, but it's fair to conclude that there's room for higher valuation ratios in the future. If the company diversifies its customer base and starts churning out consecutive quarters of solid revenue growth, then investors will become more bullish. The market should respond favorably if BigBear can smoothly integrate the Pangiam acquisition and make the combined entity greater than the sum of its parts. Successfully navigating the next capital raise and maintaining a reasonable burn rate will go a long way to instill investor confidence, too.
To reach a $1 billion market cap by next year, BigBear needs a combination of revenue growth and valuation inflation. If it meets its own $200 million full-year forecast, that implies a price-to-sales ratio of 5 to hit $1 billion in market cap. That ratio is still substantially lower than many of the high-profile AI stocks today. If the market doesn't attach a more bullish valuation, then high growth is necessary next year. It would need 65% growth in 2025 with a price-to-sales ratio of 3. Only 25% growth would be necessary with a price-to-sales ratio of 4.
Swelling investor optimism is BigBear's most likely path to $1 billion in the next year, and that probably hinges on a string of impressive quarterly reports.
Ryan Downie has no position in any of the stocks mentioned. The Motley Fool recommends C3.ai. The Motley Fool has a disclosure policy .
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