The field of artificial intelligence (AI) is rapidly gaining traction as a prime investment opportunity, and this excitement is well-founded. Microsoft CEO Satya Nadella has referred to AI as “the next major wave of computing,” underscoring its transformative potential.
A diverse range of companies are harnessing AI technology to revolutionize their respective industries. Notable examples include BigBear.ai (BBAI 44.81%) and C3.ai (AI 1.24%). While BigBear.ai utilizes AI to support the defense and national security sectors, C3.ai provides comprehensive AI solutions across various industries.
The Case for C3.ai
C3.ai has thrived in the wake of escalating demand for artificial intelligence solutions. The company’s capacity to provide rapid delivery of turnkey AI applications stands out as a significant advantage, complemented by a strong network of partnerships that bolster its growth.
In a notable development, C3.ai entered into a partnership with Microsoft in September, wherein Microsoft’s sales team will market C3.ai’s offerings. Furthermore, its collaboration with Google Cloud, a subsidiary of Alphabet, has proven to be fruitful, with partners playing a pivotal role in closing 62% of deals during C3.ai’s fiscal second quarter, which concluded on October 31, 2024.
This partnership support led C3.ai to achieve a fiscal Q2 revenue of $94.3 million, up 29% from the previous year. Impressively, 86% of this revenue stemmed from subscriptions, a reliable income stream that enhances C3.ai’s recurring revenue.
Financial Outlook for C3.ai
Riding on the momentum of its second-quarter growth, C3.ai anticipates revenue in the range of $378 to $398 million for its fiscal year 2025, representing solid growth from the $310.6 million reported last year. Although C3.ai has yet to attain profitability, it reduced its net loss to $66 million in Q2, down from $70 million the previous year, indicating cost management efforts are in place.
Examining BigBear.ai
On the other hand, BigBear.ai specializes in AI solutions for defense and national security applications. An example of its technology in action is an AI system deployed at Denver International Airport for automated identity verification of travelers. Its clientele includes the U.S. Air Force, Army, and, as of January 30, the Navy.
In its third quarter, BigBear.ai posted a robust year-over-year sales growth of 22%, reaching $41.5 million. However, a portion of this increase was attributed to its acquisition of facial recognition firm Pangiam the previous year, rather than purely organic growth.
Financial Performance and Profitability Challenges
A closer look at BigBear.ai’s performance reveals that its total sales for the first three quarters of 2024 amounted to $114.4 million, a slight decline from the $114.6 million reported in 2023. This underwhelming performance is particularly disappointing for an AI-focused company. Nevertheless, BigBear.ai projects revenue between $165 million and $180 million for 2024, an increase from the previous year’s $155.2 million.
Moreover, BigBear.ai’s third-quarter gross margin stood at only 26%, a concerning figure for a software firm. In contrast, C3.ai boasted a more robust gross margin of 61% in its fiscal Q2. This discrepancy highlights BigBear.ai’s struggle to achieve profitability, exemplified by its net loss of $12.2 million in Q3. Given that many tech companies accept short-term losses in favor of growth, BigBear.ai’s inconsistent sales growth raises red flags regarding its future viability under the leadership of new CEO Kevin McAleenan, who assumed command on January 15.
Conclusion: Evaluating Investment Opportunities in AI Stocks
In examining the prospects of BigBear.ai and C3.ai, it appears that C3.ai currently presents a more compelling investment opportunity, bolstered by superior financials and more consistent sales growth. However, the potential expiration of its partnership with Baker Hughes looms as a significant risk, with estimates suggesting that this partnership contributes up to a third of C3.ai’s revenue. This uncertainty complicates the investment landscape.
For now, it may be prudent to hold off on investing in either of these AI stocks. C3.ai may emerge as the more favorable long-term investment, but clarity regarding its partnership with Baker Hughes is essential. As for BigBear.ai, if it can achieve double-digit year-over-year growth in Q4, that would signal positive momentum. Monitoring the company’s performance under its new CEO will be important in determining its future viability as an investment option.
Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Robert Izquierdo has positions in Alphabet and Microsoft. The Motley Fool has positions in and recommends Alphabet and Microsoft. The Motley Fool recommends C3.ai and recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.