Is BigBear.ai a Buy?

Many artificial intelligence (AI) stocks are booming right now as companies invest hundreds of billions of dollars into building new AI services and try to fend off competition. BigBear.ai (NYSE: BBAI) -- which sells AI data analytics services to the government and private companies -- has benefited tremendously, with its share price spiking more than 370% over the past year.

But such impressive gains in such a short time deserve a closer look at whether or not the business's growth warrants its share price gains and if the stock is worth buying. Here's why I think investors should avoid BigBear.ai stock.

Image source: Getty Images.

BigBear.ai's sales are down

One troubling aspect of BigBear.ai's business is that its revenue growth is losing steam. The company's second-quarter sales fell by 18% year over year to just $32.5 million. It was the first drop in sales for the company over the past year, but it's part of a larger trend of slowing sales.

Take a look at the table below showing BigBear.ai's past four quarters and how dramatically its sales growth has fallen.

Data Source: BigBear.ai. YOY = Year over year.

Management said revenue declined "primarily due to lower volume on certain Army programs" and from "disruptions in federal contracts." All companies have disappointing quarters, but the chart above shows that slowing sales are a recent pattern with BigBear.ai.

What's more, the company failed to meet its revenue goals for 2024 and recently lowered its sales guidance for 2025. It reported 2024 sales of $158 million -- below the bottom of its range of between $165 million to $180 million for that year.

And after its poor sales performance in the second quarter, management cut this year's guidance to $132.5 million at the midpoint, down significantly from its previous estimate of $170 million.

If the company meets its sales guidance for 2025, it will represent a revenue decline of 16% from the previous year. Call me old-fashioned, but I think growth companies should be ... growing. BigBear.ai is failing to do this right now and appears to be continuously moving in the wrong direction.

The company's losses are widening

Unsurprisingly, BigBear.ai is losing money right now. The company reported a loss of $8.5 million in the second quarter based on adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA). That was more than double the company's EBITDA loss of $3.7 million in the year-ago quarter.

It's not always a red flag for a growth company to report significant losses, but BigBear.ai's losses expanding by so much isn't a good sign, and the fact that its sales aren't improving means that the company will have an increasingly difficult time trying to close the gap on those losses.

The company said its widening losses were primarily a result of decreased gross margin and an increase in research and development (R&D) expenses. Its gross margin fell from 27.8% in the year-ago quarter to 25%, and R&D expenses rose 23% to $4.3 million.

Increasing R&D expenses wouldn't be a huge problem if BigBear.ai generated significant revenue from its investments to make them worthwhile. It's too early to know whether that will happen, but when we add up all of the above, the company doesn't appear to be moving in the right direction on nearly any of its financial fronts.

BigBear.ai stock isn't a buy

Given the financial picture, the company's stock isn't a buy right now. I think some investors may be getting a little carried away with the stock right now due to some hype around AI stocks rather than BigBear.ai's results.

Chris Neiger has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.