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From an instinctual contrarian view, BigBear.ai (BBAI) appears to be a perfect contrarian buy. For one thing, analysts still like BBAI stock. After all, the underlying enterprise — which provides decision-making solutions based off artificial intelligence — is powerfully relevant. I don’t need to tell you how generative AI has radically changed the world. Yet even the most speculative entities don’t lose 39% in one week without justification.
Fundamentally, BigBear.ai appears to have gone off the rails. Prior to the company’s fourth-quarter earnings report, analysts anticipated a loss per share of 14 cents on $54.6 million in sales. Unfortunately, the actual loss was much worse at 43 cents per share. Also, the actual sales tally of $43.8 million truly missed the mark.
Adding to the woeful display, BigBear.ai revealed high and rising operating costs. With annual sales growth only reaching 8% year-over-year while suffering rising research and development costs to the tune of 15%, investors saw the writing on the wall — the tech specialist won’t be profitable anytime soon.
A contrarian might argue that a 39% weekly haircut may be an overreaction. It’s possible but not particularly likely. You see, BBAI stock trades at a 4.93X sales multiple. For fiscal 2025, the high-side sales estimate calls for $178.8 million. Based on the current market capitalization, BBAI is only trading at a forward revenue multiple of 4.7X.
That’s assuming better-than-expected performance for the current fiscal year amid a troubling economic environment. In the first quarter of 2024, BBAI stock traded hands at 1.97X sales. From a basic financial assessment, BBAI likely has more to drop.
BBAI Stock Options Are Cheap…But in Which Direction?
Barchart Premier members may recognize BBAI stock options as cheap. That’s because when you consider the implied volatility of BBAI derivatives across multiple option chains (expiration dates), the IV is lower than the historic volatility. Such information can be a critical framework when considering straddle or strangle ideas.
However, IV analyses don’t address the fundamental question — cheap (or expensive) in which direction?
When IV is lower than HV, this framework applies to both calls and puts. While there could be minor variations due to supply/demand imbalances, these differences are relatively minute. To better understand the directional implications, investors need more data.
A good place to start your research is Options Flow, which is a screener that focuses exclusively on derivative transactions placed by institutional investors. Using the historical date function, net trade sentiment was aggressively positive heading into BigBear.ai’s earnings report, particularly on Tuesday, when the metric popped at $636,900.
During the days when options flow was bullish, the delta imbalance — or the necessary hedging activity that market makers conduct to protect themselves from the risk associated with accommodating institutional money flows — was also positive. But when the earnings were revealed, the market makers had to respond aggressively, contributing to the severe fallout in BBAI stock.
Notably, net trade sentiment on Friday (post-earnings) was $145,200 below parity. If the institutional money viewed BBAI stock as a contrarian opportunity, it has a funny way of showing it.
The other mechanism to better determine directional probability is to study the numbers, something that Premier members have access to with Barchart’s downloadable Historical Data. As a baseline, a position entered at the beginning of the week has a 42.26% chance of being profitable by the end of it. Over a six-week period, this probability rises only modestly to 44.79%, which is still poor.
However, when considering dynamic probabilities — in this case, accounting for one-week losses worse than 20% — the odds worsen. Six weeks after the aforementioned extreme-fear event, BBAI stock only has a 36.4% chance of being profitable. Raising the parameters to bring in more data still doesn’t change the odds materially. Six weeks after BBAI loses 15% or worse over a one-week period, the long odds are down to 36% flat.
Putting It All Together
Based on the empirical data, BBAI stock is likelier — though not guaranteed — to fall over the next six weeks. Assuming the negative scenario, BBAI in similar circumstances has suffered a median loss of 22.67%. Based off of Friday’s close, there’s a considerable risk that shares could drop to $2.08 by the options chain expiring April 17.
It’s worth pointing out that Barchart’s Expected Move calculator projects a low-end price of $2.33 for that expiration date. So, I largely agree with the math that calculated this projection. But the difference between the standard approach and mine is that I’m calculating a higher probability of the bearish projection coming true rather than the bullish. Therefore, I do not believe the straddle/strangle is worth the double premium.
Instead, I’m much more tempted by the directional wager, specifically the April 17 3.00/2.50 bear put spread. This transaction calls for buying the $3 put and simultaneously selling the $2.50 put, using the proceeds from the short put to partially offset the debit of the long put. At time of writing, this trade carries a maximum payout of 100%.
The speculation is that, again, BBAI stock will drop to $2.08 at the April 17 expiration date. If so, that’d be more than enough to trigger the max payout.
