This small AI software company needs to prove that it can grow in the shadow of larger competitors.
Lumen Technologies was one of the biggest comeback stories of 2024. The struggling telecom company’s stock price fell below $1 in June as investors spooked at the slow demise of the business wireline sector. However, it has skyrocketed to around $6 over the past four months as it has won some major AI deals.
Microsoft largely rescued Lumen by signing an artificial intelligence (AI) connectivity deal to upgrade its cloud infrastructure in Azure. Lumen said it had secured $5 billion in new business related to the AI connectivity market by early August and was in “active discussions” to “secure an additional $7 billion in sales opportunities.” .
The initial payments from these contracts are expected to increase free cash flow (FCF) to a positive range of $1.0 billion to $1.2 billion in 2024.
Image source: Getty Images.
The cash injection has brought Lumen back from the brink of bankruptcy, but it remains unclear whether it can generate enough revenue from AI-related contracts quickly enough to offset the long-term decline in the non-AI business wireline market. The jury is still out on whether Lumen’s recovery will be long-term, but short-term change is definitely something companies in a similar position would like to see.
So instead of wondering whether Lumen can make an AI-driven recovery, investors may want to look for other beaten-down tech stocks that may be saved by the long-term growth of the AI market. One of those stocks could be BigBear.ai (BBAI -2.45%), an enterprise AI software company that went public after merging with a special acquisition purpose company (SPAC) in 2021.
What does BigBear.ai do?
BigBear.ai develops data mining and analysis tools that aggregate data from disparate sources to help clients make faster and more informed decisions. It differs from other data mining platforms in two ways. One is to deliver the service as a small module that can be plugged into a client’s existing software infrastructure, and the other is to run the service primarily in the edge network rather than the core network.
These niche strategies seemed promising, and the company appeared well-positioned to benefit from long-term growth in the edge networking, analytics, and AI markets. But like many other SPAC-backed AI startups, BigBear.ai set unrealistic growth targets in its pre-merger presentation and fell short of those projections by a mile.
metric
2021
2022
2023
Revenue (forecast)
$182 million
$277 million
$388 million
Revenue (actual)
$146 million
$155 million
$155 million
Gross profit margin (forecast)
40%
43%
50%
Gross profit margin (actual)
twenty three%
28%
26%
Data source: BigBear.ai.
BigBear.ai blamed this disappointing growth on macro headwinds. Competitive challenges. And in 2023, Virgin Orbit, a major customer, went bankrupt. CEO Reggie Brothers unexpectedly resigned in October 2022 as the company’s growth stalled.
The brothers’ successor, Mandy Long, sought to grow BigBear.ai’s revenue again this year by completing an all-stock acquisition of AI vision technology company Pangiam and winning new government contracts. The company also actively curbed spending in order to return adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) and cash flow to positive levels in the second half of 2023.
BigBear.ai expects 2024 revenue to increase 6% to 16%, in the range of $165 million to $180 million. Analysts expect sales to rise 11% to $172 million, but still expect adjusted EBITDA to be negative $7 million. In 2025, the company expects sales to increase 14% to $196 million, with adjusted EBITDA expected to be negative $2 million.
Although these growth rates are slow, BigBear.ai’s $537 million enterprise valuation looks pretty cheap considering it’s three times this year’s sales. Company insiders have bought more than twice as many shares as they sold in the last 12 months.
But BigBear.ai probably won’t replicate Lumen’s recent gains
BigBear.ai’s stock is trading nearly 90% below its all-time high, but a multi-bagger recovery like Lumen’s likely won’t happen for three simple reasons.
First, it’s not yet at the scale of attracting the attention of major customers like Microsoft to completely upgrade their AI infrastructure. The company recently secured more government contracts and data-sharing partnerships with Amazon Web Services (AWS) and Palantir Technologies, but those deals do little to boost revenue in the short term.
Second, BigBear.ai won’t attract much attention as long as it grows slower than its larger competitors in the data mining and AI market. By contrast, analysts expect Palantir’s revenue to grow 24% in 2024 and 21% in 2025, making it already consistently profitable under generally accepted accounting principles (GAAP). There is.
And third, Lumen shrewdly turned lemons into lemonade by attracting new AI-connected customers to its slow-growing wireline business segment. BigBear.ai also seems to have a lot of lemons, and it would have grown very little without this year’s acquisition of Pangiam, but there still doesn’t seem to be a way to squeeze lemons into lemonade.
BigBear.ai may be an interesting turnaround for speculative investors, but I don’t think it will generate explosive profits in just a few months like Lumen. They need to prove that their business model is sustainable and that they can continue to grow in the shadow of big AI companies like Palantir and big tech companies like Amazon.
John Mackey, former CEO of Amazon subsidiary Whole Foods Market, is a member of the Motley Fool’s board of directors. Leo Sun has a position at Amazon. The Motley Fool has positions in and recommends Amazon, Microsoft, and Palantir Technologies. The Motley Fool recommends the following options: A long January 2026 $395 call on Microsoft and a short January 2026 $405 call on Microsoft. The Motley Fool has a disclosure policy.
