BigBear.ai (NYSE: BBAI) and C3.ai (NYSE: AI) have both faced significant challenges since going public, disappointing early investors with their lackluster performance. BigBear.ai merged with a special purpose acquisition company (SPAC) in December 2021, debuting at $9.84 per share but currently trading around $6. Meanwhile, C3.ai’s traditional IPO in December 2020 saw its shares initially priced at $42, but it now hovers at approximately $13. Both companies have grappled with slowing sales growth and ongoing losses, exacerbated by rising interest rates that have further compressed their valuations.
This raises the question for contrarian investors: is it time to consider these underperforming AI stocks as potential turnaround plays? A closer examination of their business models, growth trajectories, and valuations reveals critical insights.
BigBear.ai and C3.ai develop AI-driven modules that integrate with existing software to optimize various tasks. However, their revenue sources differ significantly. BigBear.ai primarily relies on government and defense contracts, while C3.ai caters to a broader spectrum of enterprise and governmental clients. BigBear.ai has a unique edge-centric deployment strategy that allows its modules to operate between central servers and end users, enhancing response times for critical operations. This capability is particularly crucial for government missions, which often require uninterrupted service without dependence on centralized cloud infrastructures.
C3.ai also employs a hybrid approach, utilizing both edge networks and local installations to serve its commercial customers. Despite a more extensive client base, C3.ai has recently shifted toward lower-margin businesses to sustain its revenue growth, raising concerns about profitability.
In terms of growth metrics, BigBear.ai’s revenue has stagnated, with a compound annual growth rate (CAGR) of just 3% from 2021 to 2024. Struggles intensified after losing its primary customer, Virgin Orbit, and facing competitive pressures. The acquisition of AI vision firm Pangiam in 2024 offered a glimmer of hope, yet forecasts for 2025 indicate a revenue decline of 11% to 21% as federal spending tightens. Analysts predict that BigBear.ai’s gross margins will continue to shrink, and it is expected to remain unprofitable for the foreseeable future.
The appointment of Kevin McAleenan, a former Acting Secretary of the Department of Homeland Security, as CEO last January was seen as a strategic move to secure new government contracts. However, analysts caution that any potential deals will not significantly impact short-term revenue or profitability.
In contrast, C3.ai has shown more robustness, with a 15% CAGR from fiscal 2022 to fiscal 2025, bolstered by new generative AI module launches, federal contracts, and partnerships, including a key joint venture with Baker Hughes (NASDAQ: BKR) extending through 2028. Nonetheless, its gross margins have contracted as it increasingly relies on lower-margin services. Looking ahead, C3.ai expects a 26% decline in revenue for fiscal 2026 as it restructures its sales and marketing teams while navigating macroeconomic headwinds.
Despite these challenges, C3.ai forecasts an 11% revenue increase for fiscal 2027, projecting a stabilization in its operations. However, it must still contend with fierce competition and adverse market conditions.
Valuation metrics paint a stark picture for both companies. BigBear.ai carries an enterprise value of $2.7 billion, translating to a price-to-sales ratio of 16, compared to C3.ai’s $1.2 billion enterprise value and a price-to-sales ratio of just four. Given that BigBear.ai generates less revenue and grows at a slower pace while being heavily dependent on unpredictable government contracts, its higher valuation seems unwarranted. This positions C3.ai as a potentially more attractive turnaround candidate.
For investors considering BigBear.ai, it’s essential to note that the company’s outlook remains tenuous. The Motley Fool’s Stock Advisor team recently identified ten stocks they believe are currently more promising investments, with BigBear.ai notably absent from that list. Historical performance suggests that early investments in selected stocks have yielded substantial returns, highlighting the need for careful consideration.
In summary, while both BigBear.ai and C3.ai face uphill battles, C3.ai’s lower valuation and broader client base offer a more compelling narrative as investors look for potential recovery in the AI sector. As the industry continues to evolve, discerning which companies can navigate these turbulent waters will be crucial for capitalizing on future growth opportunities.
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