Growth Stock: BigBear.ai

BigBear.ai (BBAI.US) describes itself as a fast-growing business that is well-suited for leveraging artificial intelligence and machine learning to deliver insights to customers. In fact, the company's track record goes back to the first quarter of 2021, when it reported its first quarterly report, despite the fact that in its own company presentation, it indicates that it has had close ties (contracts) with the Department of Defense of the United States, one of its main, if not the main, asset of interest from the investor point of view.

Introduction

But since it's a relatively new company, it deserves a more extensive introduction to what it does.

BigBear.ai is a leading artificial intelligence and data analytics company dedicated to providing innovative solutions for a wide range of industries. Founded in 2020, BigBear.ai has quickly established a strong reputation for expertise in processing and analyzing large volumes of complex data.

The company specializes in developing advanced artificial intelligence and machine learning algorithms to extract valuable insights from heterogeneous and unstructured data sets. Using cutting-edge technologies such as natural language processing, computer vision, and network analytics, BigBear.ai is able to transform raw data into actionable insights for its clients.

BigBear.ai offers tailored solutions that address its clients' specific challenges in areas such as defense and homeland security, healthcare, energy and environment, finance and trade, and more. Its solutions enable organizations to optimize their operations, improve decision making and gain a competitive advantage in an increasingly complex business environment.

In addition to its focus on artificial intelligence and data analytics, BigBear.ai is also noted for its commitment to ethics and transparency in the use of technology. The company strives to ensure that its solutions are fair, unbiased, and respectful of privacy and data security.

With a team of experts in data science, software engineering, and industry-specific domains, BigBear.ai is continually innovating and developing new solutions to meet emerging challenges in the world of data. His customer-centric approach, combined with his technical expertise, has made BigBear.ai a leading company in the field of artificial intelligence and data analytics.

It's balance sheet doesn't hold up financially, but that's how they all start.

As a growth company, BigBear.ai is highly indebted (its financial obligations are expected to reach 60% of market value in the next 3 years).

If anyone cares about this data, they should look for another growth sector, but for those used to considering new disruptive sectors, this is the norm. For now, it looks like, despite the risks, it's all about AI actions going off like a rocket straight to the Moon. But over time, only those that consolidate their balance sheet and provide stability will survive.

However, its graph is not attractive at all, but in a sector where the headlines are important, they could be enough to see explosive growth, but for now, it seems that neither the prospects for Nvidia nor the results of the rest of the companies in the sector seem help the price of BigBear.ai, time will prove it right or not.

BigBear.ai (BBAI.US), comparing to C3.ai (AI.US) or SoundHound (SOUN.US). D1. Source: xStation

But why BigBear.ai? Why right now? It's a good opportunity?

BigBear.ai Quarterly Report (10-Q)

As we have already seen in the introduction, BigBear.ai's operations span autonomous systems, cybersecurity, and supply chain and logistics. BigBear.ai seeks to provide information to clients to help them understand how known and unforeseen forces affect their operations.

It seeks to take advantage of Big Data so that customers' decision and course of action can better achieve their operational objectives.

Meanwhile, for the first quarter of 2023, BigBear.ai's order book ended down 10% year-on-year. Remember that reserves are a reliable indicator of revenue growth rates that will be recognized in the earnings statement. For a rapidly growing business, with high demand, we would expect to see accumulation increase. And the faster the better. It's not moving any lower, like BigBear.ai's order book did in Q1 2023. And it's literally tearing its price apart.

However, revenue growth rates are disappointing

BigBear.ai Quarterly Report (10-Q)

BigBear.ai's revenue growth rates are in the mid-single digits. This is despite the comparison with what was reported the previous year.

Also, despite all the hype surrounding AI, we should consider the following.

Income guide for 2023, source: BigBear.ai

This was the guidance that BigBear.ai released along with its Q4 2022 results. And now that the business world has caught up with the AI fever, BigBear.ai has only reaffirmed its guidance.

Although, as you can imagine, with AI literally in its name and such enthusiasm among business leaders to get involved in this space, BigBear.ai still doesn't seem to be benefiting from this high demand. That is the general problem. But the story does not end here.

The profitability profile is not convincing

BigBear.ai Quarterly Report (10-Q)

Above we can see that in the first quarter of 2022, Gross Margin/Revenues were 27.11%, while at this time last year their gross margins were 24.22%.

Consequently, the BigBear.ai business is not only offering very low gross margins, but it appears that the business is not gaining much in terms of positive operating leverage for now. Despite the cost of this leverage, for now it hurts the bottom line, going from a loss of $18.8 million to a loss of $26.2 million (loss increased by 39.25%).

Looking at it from another perspective, BigBear.ai ended the first quarter of 2023 with approximately $22 million in cash and cash equivalents on its balance sheet. But against that cash, there is more than $190 million of debt.

BigBear.ai Cash Flow (10-Q)

BigBear.ai Balance Sheet (10-Q)

Also, keep in mind that BigBear.ai is still burning through its free cash flow at a high rate. More specifically, BigBear is on track to burn at least $40 million of free cash flow this year. With its balance sheet having less than $22 million in cash, this will mean that BigBear.ai will be at risk of running out of liquidity soon.

Also, this $22 million cash figure that BigBear.ai has on its balance sheet is because it raised $22 million in cash in the first quarter through a private placement in the first quarter.

For context, know that in 2022 BigBear.ai spent $49 million of free cash flow. Therefore, estimated that BigBear.ai spent $40 million of its free cash flow already factoring in the possibility of improvement in its cash flow profile, given management's comment that they expect the core business to hit the break even point in the second half of 2023.

Negative Stockholders' Equity, a bad sign

Surely you have noticed the Balance Sheet, that the Stockholders' Equity computes as negative (deficit) and this is due to the fact that the liabilities are greater than the assets.

If a company has more liabilities than assets on its balance sheet, its financial statements will show a negative Stockholders' Equity deficit. A negative Stockholders' Equity can be a bad sign for a business, although the fact that it exists does not necessarily mean that the company is in dire financial straits. It all depends on it's circumstances.

Stockholders' Equity consists of two elements: contributed capital and retained earnings (reserves). Contributed capital is the money the company received from the sale of shares. Realistically, this amount will not be negative, therefore, if the company shows a negative Stakeholders' Equity, it will be because the retained earnings show a deficit (loss), and also one that exceeds the amount of capital contributed. Retained earnings are the sum total of all profits and losses the company has experienced in its history, less dividends paid to shareholders. If retained earnings are negative, it usually means the company has been losing money, which is how a company ends up with liabilities over assets.

A negative Stockholders' Equity can be, and often is, a bad sign. It means that the company has not only been losing money, but that it has lost more money than its owners (shareholders) invested in the company in the first place. And the losses are depleting the assets with the step. On the other side of the accounting equation, a business that borrows money to stay afloat ends up with ever-increasing liabilities. As the company accumulates debt, it has to spend more money just to pay off that debt, paying more interest at higher rates, making it harder and harder to get out of the hole. This is exactly the type of bankruptcy spiral that BigBear.ai seems to be projecting for now.

Although it is not always an indicator of impending death. Startups often lose money for a while while they lay the groundwork for success. Once a company enters positive results, it can begin to reduce that deficit. A large amount of debt may not be as bad as it seems if the business is generating the cash flow to comfortably pay off that debt on time or ahead of schedule. In addition, due to accounting standards, major assets may be listed on the balance sheet at substantially less than their actual value, or may not be listed at all, distorting the accounting equation.

For this reason, the subjective perception of the company regarding how its activity will be resolved over time will depend on the investor's profile, but being strict with what we have on the table, the decision is quite clear.

Conclusion

At the start of any period of extreme visibility, there is likely to be a large amount of capital chasing a sector. And while we can all say that AI will vastly change the way we operate in the world, it doesn't take an analyst to figure it out, BigBear.ai doesn't seem like the best example of choosing to invest in this trend.

Although the action is small and does not have enough history, it does not mean that it is undervalued today. Therefore, we will closely monitor this sector, because everything indicates that in the race for AI, some company will fall by the wayside.

Dario Garcia, EFA
XTB Spain