2023-09-26 07:03:41 ET
Summary
- BigBear.ai specializes in AI-powered decision intelligence solutions for markets such as global supply chains & logistics, autonomous systems, and cybersecurity.
- BBAI's financial situation is challenging, with a substantial debt load and derivative liabilities exceeding their cash reserves, making capital raising difficult.
- Concerns arise from their volatile and unpredictable revenue growth rates, as well as significant customer concentration, with four entities contributing 60% of revenues.
Investment Thesis
BigBear.ai ( BBAI ) is a business that has a mighty compelling narrative. Indeed, I have to admit that even though I had my doubts about the business, I didn't put a sell rating on the stock at the time.
But as time has progressed, I don't believe that BigBear.ai's prospects have improved. In fact, I believe that its balance sheet is in a perilous state and will be its downfall.
Rapid Recap
Six months ago, in my analysis titled, "A Lot of Hype, But Does It Matter," I wrote,
Does anyone truly mind that within the next 3 years BigBear.ai Holdings, Inc. has a debt stack that is more than 60% of its current market cap? I don't believe that's the game here. For now, it appears that despite the risks, it's all about AI stocks going to the moon. But in time, rational minds will prevail.
Since then, the stock is down more than 50%, see below.
BBAI author's performance
I then followed up that analysis by saying,
At the start of any highly hyped period, there's bound to be a lot of capital chasing a sector. And while I feverishly believe that AI will massively change the way we operate in the world, I don't believe that BigBear.ai is the right way to invest in that trend.
Since that follow-up analysis, the stock is also down significantly. So, with this context in mind, you'll probably want to know, do I believe that now there's enough margin of safety? I don't believe that's the case. And here's why.
BigBear.ai's Near-Term Prospects
BigBear.ai is a technology-driven organization specializing in AI-powered decision intelligence solutions. Originally, BigBear.ai had two primary business segments: Cyber & Engineering and Analytics, but in 2022 its Cyber & Engineering segment saw a significant goodwill impairment, which now means there's been a restructuring and only one reportable segment.
Moving on, BigBear.ai's mission is to provide clarity to clients facing complex decisions by harnessing AI technologies and analytics.
BigBear.ai primarily serves three key markets: global supply chains & logistics, autonomous systems, and cybersecurity, with large and growing total addressable markets, see below.
Next, BigBear.ai offers technology and management consulting services, focusing on areas such as cloud engineering, enterprise IT, cybersecurity, and more.
BigBear.ai's solutions are used by a diverse range of customers, including federal defense and intelligence agencies. These solutions empower customers to make informed decisions by processing complex data, identifying blind spots, and generating predictive outcomes.
BigBear.ai believes that its competitive advantage lies in its team of experts and track record of success in delivering innovative solutions quickly, offering competitive pricing, and providing robust support to its clients.
Moreover, they have a history of building on their relationships with government agencies . Indeed, recent notable wins include a contract worth over $7.7 million with the US Army for Phase 2 of the Army Test & Evaluation Command's mission management system. This contract involves providing a modern, no-code, low-code solution to replace a legacy system, and it demonstrates the company's ability to deliver advanced technological solutions to government clients.
Also, BigBear.ai has secured a 6-month extension for the Global Force Information Management system, valued at just over $8.5 million, further solidifying their relationship with the US Army.
I believe this context provides context into the different moving parts of the business. Next, let's dig into its financials.
Revenue Growth Rates Are Unpredictable
The most obvious consideration when it comes to BigBear.ai is that despite its alluring narrative, its revenue growth rates are volatile and unpredictable. This is not a secular story with rapid revenue growth rates. This is more of a consulting business. Furthermore, it's worth keeping in mind, that BigBear.ai has significant customer concentration, see below.
In practical terms, this means that four different entities make up 60% of its revenues. Thus, if anyone were to slow down its contracting with BigBear.ai, this would lead to a significant loss of revenues.
Next, let's discuss its valuation.
BBAI More Expensive Than it Appears
After raising $23 million worth of capital in June, BBAI was able to end Q2 with $30 million of cash on its balance sheet. Against this cash, BBAI has more than $190 million of debt, plus $40 million of derivative liabilities.
Given that looking out to the end of this year, the business is not expected to be EBITDA breakeven, I have to question, how will BigBear.ai succeed in raising capital in the current market environment?
The Bottom Line
I have been following BigBear.ai, and while their narrative has been compelling, my doubts about the company's prospects have grown over time. The company's balance sheet appears to be in an unstable state. Despite the initial hype around AI stocks, it seems that rationality is starting to prevail in the market, and BBAI's stock has declined significantly.
While the company has notable wins with government agencies and a history of delivering innovative solutions, concerns arise from their volatile and unpredictable revenue growth rates, as well as significant customer concentration.
Moreover, BBAI's financial situation is a cause for concern, with substantial debt and derivative liabilities outweighing its cash reserves. Given their projected EBITDA breakeven timeline, raising further capital in the current market environment appears challenging. Overall, despite its compelling narrative, BBAI's current financial and market conditions raise doubts about its near-term prospects. I recommend investors avoid this name.
For further details see:
BigBear.ai: A Bearish Outlook For Investors