Can BigBear.ai become the next Microsoft?

BigBear.ai (NYSE: BAI) has disappointed many investors since its public debut on December 8, 2021. The enterprise AI software company went public by merging with a special purpose acquisition company (SPAC), with its shares trading at $9.84 on the first day of the merger. But today it’s only worth about $1.50 a share.

BigBear.ai initially impressed investors with high growth estimates. But like many other SPAC-backed companies, BigBear.ai missed its own predictions by a mile and became an easy target for the bears. Could BigBear.ai recover and evolve into a tech titan? Microsoft (NASDAQ: MSFT) over the next few decades – or will its business model simply collapse?

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What does BigBear.ai do?

BigBear.ai develops data mining and analysis tools that are used to aggregate information from various sources. These modules, which can be connected to edge network applications, can help organizations make faster, data-driven decisions. Before its public debut, it was integrated Palantir‘S tools for your own Observe, Orient and Dominate modules.

In a pre-merger presentation, BigBear.ai stated that it can grow its revenues at a compound annual growth rate (CAGR) of 40% from 2020 to 2023, increase gross margin from 30% to 50% over that time and maintain adjusted earnings before interest, taxes, depreciation and margin (EBITDA) is at the level of several years. In fact, the company’s revenue only grew at a CAGR of 3.5% from 2020 to 2023, gross margin declined to 26%, and adjusted EBITDA became negative.

It blamed the slowdown on unfavorable macroeconomic factors and the bankruptcy of major client Virgin Orbit, but it also faced stiff competition from similar analytics platforms. Its CEO Reggie Brothers also resigned abruptly in October 2022.

The successor of the brothers, the former IBM CEO Mandy Long has tried to stabilize BigBear.ai in three ways: she oversaw the all-stock acquisition of artificial intelligence technology company Pangiam in March to expand its ecosystem and increase revenue, secured more government contracts, and focused on lowering the costs to scale its business.

Analysts expect BigBear.ai’s revenue to grow at a CAGR of 16% from 2023 to 2026 on the back of Pangiam integration while improving the macro environment. They also expect the company’s adjusted EBITDA to return to positive territory in 2025. These growth rates may seem weak compared to original forecasts, but the company’s stock appears undervalued at double this year’s sales.

But can we compare BigBear.ai to Microsoft?

Analysts expect BigBear.ai to generate revenue of $199 million in 2024. This would be comparable to Microsoft’s revenues of $198 million in fiscal year 1986. At that time, Microsoft generated most of its revenues from its MS-DOS operating system, its XENIX enterprise operating system, various program compilers, and productivity applications such as Word, Chart and Multiplan. It released the first version of Windows only at the end of 1985.

However, from fiscal 1986 to fiscal 2023, Microsoft’s annual revenue grew at a CAGR of 21%, from $199 million to $211.9 billion. This solid long-term growth was driven by growing adoption of Windows on PCs, the popularity of productivity-enhancing office software, and continued expansion into the cloud, mobile, gaming and artificial intelligence markets. It has also acquired a long list of smaller companies to expand its software and hardware ecosystems.

When Microsoft was about the same size as BigBear.ai, it was already growing at a much faster pace and had a more diversified business. Microsoft also posted big profits; generated net income of $39 million in fiscal 1986, which grew at a 22% CAGR to $72.4 billion in fiscal 2023. BigBear.ai is expected to report a net loss of $161 million this year – and it is expected to remain unprofitable for the foreseeable future.

Why BigBear.ai won’t become the next Microsoft

To evolve into the next Microsoft, BigBear.ai will need to stabilize its business, expand its portfolio and turn a profit. If it doesn’t check these criteria, investors will dismiss it as just another struggling tech company that can’t carve out a niche of its own. Even if BigBear.ai successfully scales its operations, it likely won’t dominate the data mining and analytics market in the same way that Microsoft has conquered the operating system and office software markets.

Based on these facts, it seems doubtful that BigBear.ai will ever become a trillion-dollar tech titan like Microsoft. However, it may still be an undervalued growth instrument if it finally comes to fruition in the next few years.

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Leo Sun has no position in any of the stocks mentioned. The Motley Fool holds positions in and recommends Microsoft and Palantir Technologies. The Motley Fool recommends International Business Machines and recommends the following options: January 2026 $395 long call with Microsoft and January 2026 $405 short call with Microsoft. The Motley Fool has a disclosure policy.