Differentiating lucrative AI Stocks: Verizon versus BigBear.ai
The artificial intelligence sector experienced significant growth in 2024, with the market reaching a value of $184 billion from its previous year's value of $136 billion. Forecasts predict further expansion, with the market expected to reach an astounding $827 billion by 2030.
Two companies poised to leverage this growth are established player Verizon Communications and newcomer BigBear.ai. Verizon, with its advanced 5G network, can bring AI capabilities directly to mobile devices, a technology known as edge computing. On the other hand, BigBear.ai utilizes AI to analyze an organization's data and aid in decision-making processes.
These two companies present markedly different business profiles. Verizon, a seasoned company, boasts stable, albeit slow-growing sales. In contrast, BigBear.ai is relatively new, having gone public towards the end of 2021.
In this bustling AI landscape, which company emerges as the more promising long-term investment? Let's delve into the strengths and weaknesses of both.
The argument for Verizon
Securing AI's Future
Verizon's significant asset in driving the AI market's growth is its 5G wireless network, which serves as a critical infrastructure for bringing AI capabilities to mobile devices. This process, known as edge computing, enables AI to be deployed directly to device locations, thereby acting as the "edge" of an internet-connected computer network.
Verizon collaborated with Nvidia to deliver AI to the edge, an ambitious undertaking that requires advanced technical skills, including robust network connections capable of deploying AI to device locations and strong security measures to prevent cyberattacks.
Verizon's nascent AI edge capabilities have yet to be fully unveiled, with the company planning to demonstrate the technology to businesses in 2025.
Streamlining Investments
Verizon also has compelling investment attributes, such as a generous dividend, yielding a substantial 6.7% at the time of writing. The company has consistently increased its dividend payments for 18 consecutive years, including during the pandemic when other businesses were facing challenges and cutting dividends. This track record underscores Verizon's status as a reliable source of passive income.
In addition, Verizon maintains steady sales and profits, reporting $33.3 billion in revenue in the third quarter – a figure that remained unchanged year over year due to declining device sales amidst a challenging economy. The third-quarter net income stood at $3.4 billion.
Verizon's business also boasts strong free cash flow (FCF), ensuring its ability to meet ongoing dividend payments. Year-to-date FCF amounted to $14.5 billion, comfortably exceeding the dividend payments of $8.4 billion over the same period.
BigBear.ai
BigBear.ai primarily conducts its data analysis business for government agencies, with the U.S. government accounting for the majority of its third-quarter revenue.
The company received a boost following the announcement of a new contract with the U.S. Air Force, although specific details regarding revenue impact were not disclosed. BigBear.ai also has contracts with other entities like the Federal Aviation Administration and the U.S. Army.
In the third quarter, the company achieved sales of $41.5 million, demonstrating a year-over-year increase of 22%. However, this upsurge can largely be attributed to the acquisition of Pangiam, a facial recognition and biometrics company, in February 2024.
It's worth noting that BigBear.ai remains in the red, reporting a third-quarter net loss of $12.2 million. While several tech companies sustain losses for extended periods, plowing profits back into expanding their businesses, BigBear.ai's third-quarter sales growth can primarily be attributed to the Pangiam acquisition, which indicates that its core business may be struggling despite operating in the dynamic AI sector.
To illustrate this point further, let's examine first-quarter sales, which took place prior to the Pangiam acquisition. The quarterly revenue dipped by 21% year over year to $33.1 million. This decline can be attributed to the completion of Air Force-related projects secured in 2023 and the loss of a customer, Virgin Orbit, which filed for bankruptcy.
Weighing the Options
In deciding which company represents the better long-term AI investment, stock valuation should also be considered. At the time of writing, Verizon's price-to-sales (P/S) ratio is notably lower than BigBear.ai's, suggesting that Verizon's stock is a more attractive investment choice. This, coupled with the uncertainty surrounding BigBear.ai's ability to grow its business, lends credence to the argument in favor of Verizon.
There's a possibility that BigBear.ai may secure more clients in the future. However, given the present circumstances, it's advisable to monitor its progress for several quarters before making a decision to invest. Verizon, by contrast, offers a dependable dividend and significant potential for share price growth due to its edge computing opportunities.
Investors looking to capitalize on the growth of the AI sector might consider strengthening their portfolios with shares of Verizon or BigBear.ai. Given Verizon's impressive 5G network and strategic partnership with Nvidia, the company has the potential to revolutionize edge computing, making it a compelling investment opportunity. Furthermore, Verizon's generous dividend, consistently increasing dividend payments, and strong free cash flow make it an attractive passive income source.
On the other hand, BigBear.ai, while demonstrating potential with government contracts and acquisitions, is currently in the red and relies heavily on the U.S. government for revenue. Although future growth is a possibility, the uncertainty surrounding its core business and recent financial performance may warrant a cautious approach when considering it as a long-term investment.
