Better AI Stocks: BigBear.ai vs SentinelOne

Big Bear (BBAI 0.62%) and Sentinel One (S 0.54%) These are two unique ways to capitalize on the growing artificial intelligence (AI) market: BigBear.ai develops modular data mining and analytics tools that can be plugged into edge networks, and SentinelOne offers AI-powered cybersecurity tools aimed at replacing human analysts.

While these AI-driven technologies seem promising, both stocks disappointed early investors. BigBear.ai went public on December 8, 2021 through a merger with a special purpose acquisition company (SPAC). The company’s stock price started at $9.84 per share but is now trading at around $1.50. SentinelOne went public on June 30, 2021 through a traditional initial public offering (IPO) at $35 per share but is now trading at less than $20. Should investors buy either of these out-of-favor stocks for a strong performance recovery?

What happened to BigBear.ai?

BigBear.ai, like many other SPAC-backed companies, made some big promises before the merger but fell far short of those expectations: This table shows the gap between projected and actual growth rates over the past three years.

Data source: BigBear.ai.

BigBear.ai blamed the slowdown on macroeconomic headwinds and the 2023 bankruptcy of its major client, Virgin Orbit, but it also faces stiff competition from fellow startups and larger tech companies. SalesforceThe company also suffers from severe customer concentration issues (49% of its 2023 revenue comes from just three customers) and relies heavily on rigid fixed-price contracts that make it largely insulated from cost increases in an inflationary environment.

BigBear.ai’s new CEO, Mandy Long, who took over in October 2022, is trying to turn the business around in three ways:

• In order to expand short-term revenue, the company acquired AI vision technology company Pangium in March of this year.
• The company won a new government contract.
• The company has cut costs to stabilize its adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) and cash flow.

Analysts expect the company’s revenue to grow 28% to $199 million (excluding inorganic contributions from the Pangium acquisition) and its adjusted EBITDA loss to double to $6.4 million in 2024. But in 2025, they expect adjusted EBITDA to be positive by $8.6 million and revenue to grow 13% to $224.5 million.

Based on these expectations and the company’s enterprise valuation of $515 million, the stock looks cheap at less than three times this year’s sales.

What happened to SentinelOne?

SentinelOne’s revenue grew from fiscal year 2021 through fiscal year 2023 (which ended in January this year), at a compound annual growth rate (CAGR) of 113%. However, due to a decline in dollar-based net revenue retention, revenue is expected to grow just 47% to $621 million in fiscal year 2024 and 29% to 31% to $800 million to $815 million in fiscal year 2025.

The company blamed the slowdown primarily on macroeconomic and competitive headwinds, but it spooked many bulls who had grown accustomed to the company’s triple-digit growth rates: It wasn’t even profitable on an adjusted EBITDA basis, suggesting the company could be pushed out of the market by larger competitors. Palo Alto Networks and CrowdstrikeBut despite those pressures, the company’s adjusted gross margins and operating margins have improved steadily over the past four years.

Data source: SentinelOne.

SentinelOne expects its adjusted gross margin to expand to 78%-79% in fiscal 2025, and its adjusted operating margin to improve again to negative 2%-6%. Analysts expect its adjusted EBITDA loss to narrow to $108 million to $21 million. In fiscal 2026, they expect adjusted EBITDA to finally turn positive, with revenue growing 26%.

But the slowdown also means it’s growing at a slower rate than cloud-native leader CrowdStrike, which posted stable generally accepted accounting principles (GAAP) profits in its latest fiscal year and generated nearly five times SentinelOne’s revenue. It’s generally a red flag when a weaker company grows slower than the market leader. And SentinelOne, valued at $7.08 billion, still doesn’t look like a bargain at seven times this year’s sales.

Better Buy: SentinelOne

I’m not a fan of these speculative companies right now, especially with so many great AI and cybersecurity stocks still trading at reasonable valuations, but I pick SentinelOne as the better buy because its scale, growing margins, and disruptive efforts to automate the entire threat detection process using AI algorithms make it an attractive acquisition target for large technology and cybersecurity companies.