Up 30% in October, Is This AI Penny Stock a Buy?

Barchart · 10/15 08:16

Since the start of 2023, several high-profile artificial intelligence (AI) stocks have delivered staggering returns to shareholders. However, the rally has been primarily driven by mega-cap giants such as Nvidia (NVDA), Meta Platforms (META), and Broadcom (AVGO). At the same time, several other companies continue to trade at lower valuations.

One such beaten-down AI penny stock is BigBear.ai Holdings (BBAI), which trades 88% below all-time highs. Generally, stocks priced below $5 per share are considered penny stocks. While investing in penny stocks is a high-risk proposition, big tech behemoths - including Apple (AAPL) and Amazon (AMZN) - were once companies with a share price of less than $5.

BBAI stock surged close to 19% yesterday, and is up 30.8% so far in October, valuing the company at a market cap of $470 million. Let’s see if you should invest in this AI penny stock at the current valuation.

Is BigBear.ai a Good Stock to Own Right Now?

BigBear.ai provides artificial intelligence and machine learning for decision support. It has two primary business segments: Cyber & Engineering, which offers high-end technology and management consulting services, and is focused on verticals such as cloud engineering, cybersecurity, computer network operations and systems engineering, among others; and Analytics, which provides technology and consulting services, focusing on areas such as big data computing and analytical solutions that include predictive and prescriptive analytics solutions to assist customers in aggregating and synthesizing data to enable decision-making capabilities.

In Q2 of 2024, BigBear reported revenue of $38.5 million, up 3.4% year over year. Its loss per share has narrowed from $0.12 per share to $0.05 per share in the last 12 months. The company increased gross margins to 27.8% in Q2 of 2024, compared to 23.3% in the year-ago period, due to higher margin solutions.

At the same time, BBAI's adjusted EBITDA (earnings before interest, tax, depreciation, and amortization) loss widened to $3.7 million in Q2 from $3.2 million last year, due to higher recurring operating expenses and capitalized software development costs.

BigBear Bags Big Ticket Contracts

On Monday, BigBear announced that the U.S. Army has awarded the company a five-year contract worth $165.15 million for Global Force Information Management (GFIM) Production Services. Since 2021, BigBear has been working with the Army to transform 15 legacy systems into an enterprise-wide intelligence automation platform.

The primary contract requirement is to complete the delivery of an interoperable transactional global force structure and employment data system for the force management community. This system will enable effective planning, programming, and production of authoritative force structure data. Once the project is complete, the platform will empower senior leaders and commanders to quickly make data-driven force structure decisions.

Big Bear ended Q2 with a backlog of $266 million, so this contract win significantly improves its top-line visibility.

Is the AI Penny Stock Undervalued?

Analysts tracking BigBear expect it to increase sales by 10.7% to $172 million in 2024, and by another 13.9% to $196 million in 2025. The company's losses per share are forecast to narrow from $0.40 in 2023 to $0.21 in 2025.

Out of the four analysts covering BBAI stock, three recommend a “strong buy,” and one recommends a “hold.”

The average target price for BBAI stock is $3, indicating an upside potential of over 57% from current levels. However, BigBear’s tepid revenue growth and negative profit margins make it a high-risk investment right now.

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On the date of publication, Aditya Raghunath did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.