BigBear.ai vs. C3.ai: A Look at Two Emerging AI Stocks

Artificial Intelligence (AI) stocks have been making headlines lately, experiencing rapid growth and impressive valuations. Investors are optimistic about the future of AI, believing that the market will continue to expand significantly.

Among the AI stocks, one of the biggest success stories is Palantir Technologies, a leading software platform that enables users to utilize AI for data analysis and business optimization. Various U.S. intelligence agencies employ Palantir's technology for counterterrorism, which contributed to a staggering 340% increase in its stock price in 2024. This success has led investors to seek out other companies in the AI sector that may offer similar opportunities.

Two companies attracting attention in this arena are BigBear.ai and C3.ai, both of which have seen significant volatility over the past year. Analysts on Wall Street are closely monitoring these stocks, with predictions that one could increase by as much as 108%, while the outlook for the other is less favorable, with discouraging sell ratings from several analysts.

BigBear.ai: Strong Buy Potential

BigBear.ai positions itself as a key player in AI-driven decision-making. Earlier in 2024, the company acquired Pangiam, which focuses on AI applications in global trade, travel, and digital identification.

The company is primarily active in three sectors: national security, supply chain, and digital identification. In the realm of government, BigBear.ai provides predictive and forecasting tools that assist in managing risks, overseeing transportation of goods and people, forecasting events, and strengthening vendor relationships.

In the supply chain area, BigBear.ai aids businesses in planning capital investments, equipment purchases, and design processes. The acquisition of Pangiam adds advanced AI-powered facial recognition capabilities to the company's offerings.

For the first nine months of 2024, BigBear.ai reported approximately $114.5 million in revenue, consistent with the same timeframe in 2023. However, the company incurred much higher losses due to an $85 million goodwill impairment charge. Most of BigBear.ai's revenue is derived from government contracts.

Research from four analysts covering the stock indicates that three recommend a buy, while one suggests holding. The average price target is $4.33, indicating a potential upside of about 28%. The highest price target of $7 suggests an upside of 108%. Analyst Scott Buck from H.C. Wainwright recently expressed confidence in BigBear.ai, citing increased demand for its offerings and the resolution of dilution concerns related to a senior convertible note. Buck believes AI companies should command higher valuations.

Though BigBear.ai is not yet profitable and has a forward price-to-sales ratio of around 4.4, these figures are considered reasonable for an AI company. However, some investors are anxious about the company’s balance sheet and the potential need for further capital raises that could lead to shareholder dilution. Additionally, the lack of revenue growth may raise concerns as the company aims to establish itself as a growth-oriented stock. Thus, it may be prudent for investors to consider starting with a small position in BigBear.ai until clearer revenue growth trends emerge.

C3.ai: Market Concerns Despite Potential Upside

In the world of stock analysis, receiving a sell rating is infrequent, considering analysts often avoid such ratings due to potential conflicts of interest. However, the fact that four out of ten analysts have recommended that investors sell C3.ai raises a red flag.

C3.ai has created a platform designed to simplify the development of enterprise-level AI solutions. This platform aids companies with data integration, management services, and offers tools for AI application development. The company claims its technology can help businesses enhance efficiencies and unlock substantial value.

Recently, C3.ai partnered with Microsoft, making its platform available to Azure commercial clients.

In its latest quarterly report, C3.ai recorded a 29% increase in revenue, marking its highest growth rate in two years. Revenue for the first half of the current fiscal year has risen nearly 24% from the previous year. Although the company has not incurred any debt, its losses have only slightly decreased over the same period.

Despite the concerns represented by multiple sell ratings, the average price target for C3.ai still suggests nearly 18% potential upside. The highest target of $55 implies more than 73% upside potential. KeyBanc analyst Eric Heath downgraded the stock to an underweight rating, citing issues with its valuation and high earnings estimates that appear unsustainable. Heath believes the current price-to-sales ratio of 13.3 is unjustified given the company's revenue growth is stagnating around 10%-20%, resulting in a poor risk-reward scenario.

JPMorgan Chase analysts also lowered their rating for C3.ai, indicating subpar growth and margin expectations. While C3.ai has advantages, such as recent revenue growth and a solid balance sheet compared to BigBear.ai, it also faces challenges due to its higher valuation. Overall, C3.ai remains a stock worth monitoring for potential investors.

Investors should conduct thorough research and consider their risk tolerance when evaluating potential investments in AI stocks like BigBear.ai and C3.ai.

AI, Investing, Stocks