2023-04-03 14:17:04 ET
Summary
- BigBear.ai Holdings, Inc. catches a fever: Wall Street fever for AI stocks.
- BigBear.ai is not only posting very lumpy growth, but the year ahead promises to be decidedly muted.
- Further complicating matters, the BigBear.ai Holdings, Inc. business seems to be running out of cash. And its balance sheet poses a lot of questions.
- But with the BigBear.ai Holdings share price rallying strong, why bother overthinking anything?
Investment Thesis
BigBear.ai Holdings, Inc. ( BBAI ) is soaring in the past few weeks as retail investors return to the market. The topic du jour is AI. What companies are well-positioned to participate in this nascent and rapidly growing market opportunity?
On the surface, BigBear.ai has the right narrative. BigBear.ai is focusing on empowering customers to make the right decisions, at the right time, every time.
However, spending a few moments beyond its catchy slogan and the investment case rapidly falls apart.
Here I end with the rhetorical and provocative question, does it actually matter if the investment case is flimsy?
Why BigBear.ai?
BigBear.ai has the much-needed prerequisite to catch AI-fever on Wall Street. After all, the company already has AI in its name.
BigBear.ai declares that its well-positioned to leverage AI-powered to support customers' decisions. BigBear.ai allows its customers to lean on their data to harness insights. BigBear.ai makes customers' volume and variety of data make sense and become actionable.
And that sounds compelling. The problem, though, is that beyond the buzzword-heavy business, there's a business that I believe is in a risk of running out of cash. But I get ahead of myself. Let's first discuss this supposedly high-tech business.
Single Digit Growth Rates
The first characteristic that should strike anyone looking at the graphic above is that this business is highly cyclical. Obviously, a highly cyclical business means that its growth rates are variable and erratic. And by extension, if you get the occasional bump in revenues, but you don't exactly know when the next bump will come from, and that causes problems. Why?
Because investors don't want to back companies with uncertain prospects. That means a low multiple, because the company is always trying to find the next project, which may or may not come.
The next aspect that is obvious from the graphic above is that this business' growth rates are poor. This is not ''the rapidly growing AI business'' one wishes to back.
This is a highly cyclical business trying to make a name for itself.
Profitability Profile is Unenticing
When asked on the earnings call about the company's liquidity profile, this is what BigBear.ai's management stated :
[...] we are targeting to be operationally cash flow positive in the second half of the year.
Again, to be clear on what we mean by operational cash flow positive, we're focused on the on-going day to day business. So that includes, everything that would be normal operating expenses that you would see in the business as well as inflow of customer payments. It doesn't include, as I said, the interest payments , which you know, where those are, or transaction fees for severance costs and things like that. (Emphasis added.)
Simply put, management states that if we put aside its interest payments or transaction fees, the business will succeed in stopping a portion of its cash burn.
By my very rough estimates, I believe that BigBear.ai will burn through about $30 million of cash flows from operations in 2023. I haven't factored in much in the way of capex, since the business doesn't require a great deal of capex.
Nevertheless, I believe that including the $25 million capital raise subsequent to Q4 2022, by the time BigBear.ai reports Q1 the business will hold around $18 million of cash. Maybe a tiny bit less.
That will inevitably mean that this business is rapidly running out of cash. Further complicating matters, BigBear.ai also holds about $200 million worth of convertible notes that will mature in 2026. BigBear.ai will not have to deal with this debt in the next twelve months, but the debt on its book does bring covenant restrictions that will add some restrictions over the company's use of cash.
The Bottom Line
We can all sit down and debate whether BigBear.ai Holdings, Inc. is making much headway with its technology and getting new customers on board. While the fact of the matter is that in the past several weeks, the share price has jumped more than 60%.
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.
For further details see:
BigBear.ai: A Lot Of Hype, But Does It Matter