Better AI Stock: Palantir vs. BigBear.ai
Palantir (NYSE: PLTR) and BigBear.ai (NYSE: BBAI) provide artificial intelligence (AI) services to the private and public sectors. Palantir's two main platforms -- Gotham for government customers and Foundry for commercial customers -- aggregate data from disparate sources to help them make data-driven decisions. BigBear.ai develops modular data mining and analytics tools for edge networks, and it actually integrates its three core modules into Palantir's Foundry platform.
BigBear.ai is much smaller than Palantir, and it went public by merging with a special purpose acquisition company (SPAC) in December 2021. The stock opened at $9.84 on its first post-merger trading day, but it now trades at about $1.50. Palantir went public via a direct listing in September 2020 and started trading at $10. It has been through some wild swings over the past four years, but it eventually tripled to about $30.
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The market clearly preferred Palantir to BigBear.ai because it was growing faster, was more established, and was more profitable. But will Palantir remain the better AI play than the now-unloved underdog over the next few years?
Palantir expects accelerating sales growth with rising profits
Palantir was founded in 2003, and today, most U.S. defense and intelligence government agencies already use its Gotham platform to process data. It boldly claimed it would become the "default operating system for data across the U.S. government" in its S-1 filing, but it has also aggressively expanded Foundry over the past few years to reduce its dependence on government contracts.
Palantir's revenue rose by 41% in 2021, but it only grew 24% in 2022 and 17% in 2023. That deceleration, which brought it up short of its previous goal to grow its top line by at least 30% annually through 2025, was mainly caused by the uneven timing of its government contracts and macroeconomic headwinds for the commercial sector. But as its growth cooled off, the company reined in its spending and turned profitable on a generally accepted accounting principles (GAAP) basis in 2023.
Palantir expects its revenue to rise by 23% to 24% this year as it gains new government contracts, expands its U.S. commercial business, and rolls out new generative AI tools across its ecosystem. Analysts expect its GAAP EPS to more than double. From 2023 to 2026, they expect its revenue to grow at a compound annual rate of 21% and its EPS to rise at a compound annual rate of 56%. Those rates would be impressive, but the stock still looks pricey at 133 times forward earnings and 21 times next year's sales.
BigBear.ai faces existential challenges
BigBear.ai, which was founded in 2008, generated $146 million in revenue in 2021. But its revenue grew by just 6% to $155 million in 2022 and was roughly flat in 2023. That was well below the $388 million in revenue it predicted it could generate in 2023 during its pre-merger presentation. It has also stayed unprofitable on a GAAP basis.
Management blamed the slowdown on the difficult macroeconomic environment and the bankruptcy of major customer Virgin Orbit in 2023, but BigBear.ai also has severe customer concentration issues (49% of its revenue came from just three clients in 2023), relies heavily on rigid fixed-priced contracts, and faces stiff competition from similar start-ups and bigger tech companies.
Under CEO Mandy Long, who took the helm nearly two years ago, BigBear.ai acquired the AI vision technology Pangiam in March to boost its revenue, gained a few new government contracts, and aggressively cut costs to improve its cash flow.
Those efforts caused a few green shoots to appear: Its cash flow turned positive in the second half of 2023, and management expects its revenue to rise by 6% to 16% for the full year as it integrates Pangiam. Analysts expect its revenue to grow at a compound annual rate of 12% from 2023 to 2025 as it narrows its net losses. From a valuation perspective, the stock looks dirt cheap at 3 times next year's sales.
The better buy: Palantir
Palantir is pricier than BigBear.ai, but it's expected to generate about 16 times as much revenue this year, and its business model looks more sustainable. Large organizations will also generally gravitate toward well-established companies like Palantir for their data mining and AI needs rather than untested underdogs like BigBear.ai. I believe Palantir's stock -- though pricey and volatile -- will remain a more attractive AI play than BigBear.ai for the foreseeable future.Should you invest $1,000 in Palantir Technologies right now?
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*Stock Advisor returns as of September 3, 2024Leo Sun has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Palantir Technologies. The Motley Fool has a disclosure policy.
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