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Better Artificial Intelligence Stock: Verizon Vs. Bigbear.ai
The artificial intelligence market had a banner year in 2024, growing to $184 billion from $136 billion in 2023. The industry is forecast to continue expanding, reaching $827 billion by 2030.
Two businesses positioned to capitalize on the growth of artificial intelligence (AI) are the telecom Verizon Communications (NYSE: VZ) and newcomer BigBear.ai (NYSE: BBAI). The former's potent 5G network can bring AI to your mobile devices. The latter uses the technology to analyze an organization's data and help it make data-driven decisions.
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In some respects, the two businesses are opposites of each other. Verizon is a mature company with reliable but slow-growing sales. BigBear.ai is a young company, having gone public in December of 2021.
Between the veteran corporation and the up-and-comer, which wins out as the better long-term investment in the exciting field of AI? Here's a look at both to arrive at an answer.
The case for Verizon
Verizon owns a key asset in driving the AI market's expansion, its 5G wireless network, which is a major component in bringing AI to your mobile devices. This is referred to as edge computing, since your device is AI's destination, which represents the edge of an internet-connected computer network.
Verizon partnered with Nvidia to deliver AI to the edge. Doing this is no small feat; it requires a number of technical capabilities, including a fast and reliable network connection to deploy AI to your device location, and strong security to block cyberattacks.
Verizon's new AI edge capabilities are just getting started. The company will begin demonstrating the technology to businesses in 2025.
Other factors making Verizon a compelling investment include its robust dividend, yielding a hefty 6.7% at the time of this writing. The company has raised dividend payments for 18 straight years, even during the pandemic when other businesses were cutting dividends. This demonstrates it's a reliable source of passive income.
The company also produces steady sales and profits. In the third quarter, it generated $33.3 billion in revenue, which was flat year over year as device sales dropped amid a tough economy. Third-quarter net income came in at $3.4 billion.
Verizon's business also produces strong free cash flow (FCF), which ensures its dividend. Year-to-date FCF was $14.5 billion, comfortably covering dividend payments of $8.4 billion over that time.
A look at BigBear.ai
BigBear.ai's data analysis business is mainly with the U.S. government. As of the third quarter, the company said, "The majority of our revenue is derived from federal government contracts."
That's why its shares got a boost recently after management announced a new contract with the U.S. Air Force. No details were provided on the revenue impact. BigBear.ai also has contracts with the Federal Aviation Administration and the U.S. Army.
In the third quarter, the company achieved sales of $41.5 million, a 22% year-over-year increase. However, that gain was driven primarily by the acquisition of Pangiam, a facial recognition and biometrics company, on Feb. 29. Moreover, BigBear.ai is not profitable, with a third-quarter net loss of $12.2 million.
Many tech companies operate for years at a loss, plowing profits into expanding their business as fast as possible. But in this case, the fact that BigBear.ai's third-quarter sales growth came primarily from Pangiam suggests its core business is struggling despite operating in the hot AI field.
On that note, let's look at first-quarter sales, since part of that quarter's earnings occurred before the Pangiam acquisition. The quarterly revenue was down 21% year over year to $33.1 million. This was due to the wrap-up of work for the Air Force that was secured in 2023, and the loss of customer Virgin Orbit due to bankruptcy. So through the third quarter, BigBear.ai's core business seems to remain on shaky ground.
Picking between Verizon and BigBear.ai
In deciding which is the better long-term AI investment, another factor to consider is stock valuation. Here's a look at each company's price-to-sales ratio (P/S), a measure of how much investors are willing to pay for every dollar of sales.
Data by YCharts.
The chart shows Verizon's P/S multiple is the much lower of the two at the time of this writing, indicating the telecom's stock is the better value. This, combined with the uncertainty around BigBear.ai's ability to grow its business, makes Verizon the better investment.
Perhaps BigBear.ai will be able to acquire more customers over the long run. But for now, it's best to watch it for a few quarters to see how it's progressing on this front before making a decision to invest. Verizon, meanwhile, pays a reliable dividend, and its edge computing opportunities offer potential for its share price to rise.
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Robert Izquierdo has positions in Nvidia and Verizon Communications. The Motley Fool has positions in and recommends Nvidia. The Motley Fool recommends Verizon Communications. The Motley Fool has a disclosure policy.
