OB3 Bill And Global Partnerships Will Ignite Future AI Applications

Key Takeaways

• Expanding federal funding and global partnerships are boosting demand for BigBear.ai's AI solutions, increasing opportunities for customer growth and revenue diversification.
  
• Strengthened financial position allows investment in scalable AI platforms and international expansion, shifting toward higher-margin, recurring revenue and reduced reliance on large contracts.
  
• Heavy dependence on government contracts, ongoing profitability issues, stiff competition, regulatory challenges abroad, and rising operational costs threaten growth and margin improvement.

Catalysts

Provides artificial intelligence-powered decision intelligence solutions.

• The passage of the OB3 bill and associated record-level federal funding for the Department of Homeland Security and the Department of Defense is expected to generate unprecedented demand for advanced AI, autonomy, and biometric solutions-directly in BigBear.ai's areas of expertise-which can drive substantial revenue growth over the coming years as contract pipeline and addressable market size expand.
  
• There is accelerating adoption and increased investment in AI/ML and digital transformation both domestically and internationally, including partnerships with entities in the UAE and Panama, providing BigBear.ai with expanded opportunities to grow its customer base and realize higher and more diversified revenues.
  
• The company's strengthened balance sheet, with $391 million in cash, enables aggressive investment in organic growth (product innovation, marketing, and talent acquisition) and strategic M&A, positioning BigBear.ai to accelerate scale, enhance margins, and enter new markets-improving earnings potential.
  
• BigBear.ai is transitioning from reliance on a few large government contracts to a broader, more diversified pipeline, targeting additional prime contracts and expanding into international markets, which should enhance revenue visibility, reduce volatility, and improve long-term profitability.
  
• The company's focus on scalable, proprietary AI/ML platforms and SaaS offerings, including innovations in autonomy and IoT, is expected to increase recurring revenue share and deliver higher net margins as the business model moves further from custom services to higher-margin, platform-driven growth.

BigBear.ai Holdings Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming BigBear.ai Holdings's revenue will grow by 2.1% annually over the next 3 years.
• Analysts are not forecasting that BigBear.ai Holdings will become profitable in next 3 years. To represent the Analyst Price Target as a Future PE Valuation we will estimate BigBear.ai Holdings's profit margin will increase from -291.0% to the average US IT industry of 6.2% in 3 years.
• If BigBear.ai Holdings's profit margin were to converge on the industry average, you could expect earnings to reach $10.0 million (and earnings per share of $0.02) by about August 2028, up from $-443.9 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 341.0x on those 2028 earnings, up from -4.8x today. This future PE is greater than the current PE for the US IT industry at 31.0x.
• Analysts expect the number of shares outstanding to grow by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.92%, as per the Simply Wall St company report.

BigBear.ai Holdings Future Earnings Per Share Growth

Risks

• Heavy reliance on large U.S. federal government defense and intelligence contracts exposes BigBear.ai to risk from budgetary cycles, policy changes, and contract disruptions, as seen with recent Army program losses and consolidations; this could lead to revenue volatility and margin compression if such disruptions persist or increase.
  
• Persistent net losses, negative adjusted EBITDA, and recent goodwill impairment point to ongoing challenges with profitability and operating leverage; unless the company quickly translates investment and contract wins into sustainable top-line and bottom-line growth, future earnings and net margins remain at risk.
  
• Expansion into international markets, while promising, is threatened by rising regulatory scrutiny, data privacy laws, and geopolitical tensions, which may restrict access to certain regions (e.g. US-China decoupling, data localization laws in the UAE) and limit the addressable market, impacting future revenue growth.
  
• Increasing competition from larger, well-capitalized AI/analytics companies (such as Palantir and IBM) and the threat of commoditized, open-source AI/ML solutions could pressure pricing power and lower gross profit margins, especially as BigBear.ai seeks to scale proprietary platforms against industry heavyweights.
  
• Higher investment in talent and R&D needed to drive innovation, combined with ongoing talent shortages, could further increase wage and development costs, straining operational efficiency and potentially leading to prolonged negative net margins even as the company pursues aggressive expansion.

Valuation

• The analysts have a consensus price target of $5.833 for BigBear.ai Holdings based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $8.0, and the most bearish reporting a price target of just $3.5.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $162.2 million, earnings will come to $10.0 million, and it would be trading on a PE ratio of 341.0x, assuming you use a discount rate of 8.9%.
  
• Given the current share price of $5.81, the analyst price target of $5.83 is 0.4% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.