Why BigBear.ai Stock's Dip on Earnings Can Be an Opportunity

Key Points

• BigBear.ai's sell-off on earnings may not be justified, especially as investors consider what these figures really say about the upside.
• Adjusted financials show a much better quarter than reported, and institutions are buying on that fact.
• Demand is still strong, sending short sellers running away from BigBear.ai stock.

When a stock you’re following is about to report earnings, it can be an anxious time for investors. The day of the release and the days that follow are often decisive in determining whether to hold the position, sell it, or place the stock on a watchlist for future consideration if conditions improve.

Today, shares of BigBear.ai Holdings Inc. NYSE: BBAI pose that exact question, one that investors surely would like to have answered through the actual data. Although the numbers for the company’s latest quarterly earnings results seemed bad, there is some hidden information that most might have missed, as evidenced by the market’s reaction to sell the stock off by 15% in a single day.

However, that big sell-off was met with just as much buying enthusiasm, as the company traded higher toward the ranges it held before the earnings sell-off.

This reaction and optimism are based on one key piece of the financial profile, which is crucial for turning the stock around in the coming months and quarters and catching up to the rest of the aerospace sector.

What Investors Might Have Missed

Taking the quarterly earnings press release at face value, sellers were initially justified in letting go of their BigBear.ai stock; however, they might have missed one important piece of information, which will become clear in just a minute. First of all, an 18% revenue decline may be something to worry about, that is, until investors see where it came from.

The United States Army has pulled back some of its current spending (according to the company’s management), which cannot be blamed on BigBear.ai, but rather an industry-wide issue likely to affect other names in the space. That being said, a wider loss in terms of net income should be expected.

And that is exactly what happened, and likely the reason why the stock sold off so aggressively. BigBear.ai reported a net loss of $228.6 million, compared to a net loss of only $14.4 million for the same quarter last year. Of course, this directly affects the company’s path to net profitability and therefore its valuation, but that’s where being a savvy investor comes into play.

The bulk of that net loss was driven by a $135.7 million decrease in the value of convertible bonds and other derivatives, which has nothing to do with the company’s core operations and its primary business. Investment bankers would call this a “non-recurring” item, which typically gets added back to the income statement for a better picture.

All told, investors can look to the cash flow statement to get the true state of affairs, and seeing a net operating outflow of $3.8 million compared to last year’s $7 million outflow is a completely different story. It suggests that BigBear.ai actually had a much better quarter than the headline numbers may suggest.

Demand Is Very Much Alive

After the stock dipped by 15% in a single day after earnings, a few big players in the market decided to step in and react to the numbers that were just broken down. They realized that this reaction was unjustified and that a fair value for the stock may be much higher than where it trades today.

Investors can note that allocators from JPMorgan Chase & Co. decided to build a stake worth $16.3 million in BigBear.ai stock the day of the earnings release, perhaps aiding in the stock’s quick rebound after it bottomed out altogether. This should also confirm that these bankers view the non-recurring change in derivatives as an opportunity.

This opportunity is not lost on the bearish side of the equation either, as short sellers closed down 9.5% of the company’s short interest over the past month, a sign of initial bearish capitulation. However, since there are still $491.6 million worth of open short positions, a recovery rally could trigger what’s known as a “short squeeze.”

A short squeeze happens when short sellers are forced to close their positions at a loss, which involves buying back the stock and can add to upward momentum. That’s aside from the point; besides the favorable cash flow and income differences, investors still need to consider one more factor.

BigBear.ai reported up to $380 million in backlog of orders, an impressive figure, despite the Army contracts being pulled all over the industry. This justifies the recent institutional buying and optimism for the company’s future, catching up to the pack.