BigBear.ai's Margin Pressures Worsen Amid GenAI Expansion and Dilution Concerns

What happened

BigBear.ai has faced escalating margin pressures since early 2025, with gross margin contracting 240 basis points to 22.8% year-over-year and adjusted EBITDA margin deteriorating to negative 24.8% in the first nine months. This decline aligns with the DeepValue report's findings of persistently weak profitability, including negative free cash flow and earnings per share. Recent capital raises, such as ATM programs, have significantly diluted shareholders by increasing the share count from approximately 289 million to 371 million. Regulatory challenges, including compliance with the EU AI Act for biometrics, add further cost and complexity to operations. Despite strategic positioning in mission-critical edge AI, these factors highlight ongoing execution risks in scaling generative AI initiatives.

Implication

The intensified margin pressures signal that BigBear.ai's efforts to scale generative AI are not yielding profitability improvements, raising questions about operational efficiency and cost management. Persistent negative cash flows and EBITDA indicate a reliance on external financing, which could lead to further dilution if equity issuance continues. Regulatory hurdles, such as those under the EU AI Act, may increase compliance expenses and delay revenue recognition in key markets like digital identity. While the company's embedded integrations in regulated workflows provide a durable moat, near-term risks from government funding volatility and competition necessitate vigilance. Investors should await concrete evidence of margin stabilization and sustained positive free cash flow before considering any upgrade to the investment thesis.

Thesis delta

The news of worsening margins reinforces the existing HOLD thesis by highlighting that profitability challenges are more acute than previously assessed. It underscores the need for BigBear.ai to demonstrate operational improvements to leverage its AI positioning, without fundamentally altering the long-term strategic narrative. Investors should closely monitor upcoming financial results for signs of margin recovery and reduced dilution as key indicators of a potential thesis shift.