Spending on artificial intelligence (AI) has been heating up recently, and it may not necessarily be slowing down. The Stargate project, a new joint venture announced in January, will involve multiple companies -- OpenAI, Oracle, and SoftBank -- investing hundreds of billions of dollars to help build data centers and infrastructure needed for AI.
But what could that mean for a smaller AI company, such as BigBear.ai (NYSE: BBAI)? Could it stand to benefit from these developments, and will this be a potential catalyst that helps the stock rally this year?
Although BigBear.ai isn't one of the key companies involved in Stargate, nor does it sell AI-related infrastructure, it can still benefit from the project. That's because setting up the infrastructure to be ready for next-gen technologies and for deploying AI models can be an important first step for businesses looking to offer AI-powered products and services. And BigBear can help them along that path.
BigBear's decision intelligence solutions can help companies as they make complex decisions, including those related to AI. Its solutions assist companies in various industries, whether they are offering AI products and services or not. While there may not be a direct link and way that the company will benefit from the new Stargate venture, it can indirectly benefit from President Trump announcing the deal, putting more of a focus on AI and highlighting the importance of investments into that area of tech.
Investors were certainly bullish on the news, as the day of the Stargate announcement, BigBear's stock hit an intraday high of $4.82 -- an increase of more than 9% from the previous day's close. If nothing else, with BigBear being an emerging AI stock, it may still see a rise in its share price from greater excitement in AI as a whole.
What's promising about BigBear's business is that it's growing at a reasonably fast rate and still locking up deals that can lead to more growth in the future. In its most recent quarter, which ended on Sept. 30, the company's revenue grew by more than 22% to $41.5 million. And it also recently announced a five-year contract with the U.S. Army worth $165 million.
There's a lot of potential for the business, but investors shouldn't overlook BigBear's lack of profitability. Last quarter, it incurred a net loss of $12.2 million, and over the past three quarters, its losses have totaled $149.1 million. The company's gross margins are fairly light at around 25% of revenue, which means that its selling expenses and overhead will need to be lean for the business to turn a profit. But with selling, general, and admin expenses alone coming in higher than its gross profit in recent periods, it won't be an easy path for BigBear to get to breakeven anytime soon.
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On Monday, news that Chinese company DeepSeek came out with a cheap and competitive AI model put doubts in the minds of investors whether all that heavy spending on AI is really necessary. That sent tech stocks spiraling, including BigBear, which fell by nearly 11%.
BigBear would certainly benefit from an increase in AI-related spending, but the concerns raised as a result of DeepSeek could have businesses thinking twice. It's a viable concern for investors, but there are other problems when it comes to BigBear. This includes whether the business has the competitive moat necessary to dominate in what is becoming a hotly contested AI business intelligence market, where many other companies offer similar services.
And without strong financials, BigBear may be poorly equipped to spend heavily on marketing, which may be necessary to win over customers. That could result in its losses becoming deeper in the future.
Overall, with a lot of question marks surrounding the business' future, BigBear isn't a stock I'd take a chance on today. Any benefits stemming from Stargate will be indirect at best, and could take time to materialize; I don't see the business or the stock getting a huge boost from it. Unless you're willing to take on a fairly high degree of risk, you may be better off avoiding BigBear and the volatility that will come from holding its shares in your portfolio.
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David Jagielski has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Oracle. The Motley Fool has a disclosure policy.
Could the Stargate Project Help Send BigBear.ai Stock Soaring This Year? was originally published by The Motley Fool
