AI-Driven Defense Stocks in 2025: BigBear.ai and Palantir in the Crosshairs

The intersection of artificial intelligence and national security has become a battleground for innovation-and valuation volatility. In 2025, two firms stand at the forefront of this transformation: BigBear.ai (BBAI) and Palantir Technologies (PLTR). Both companies leverage AI to address defense and intelligence challenges, but their financial trajectories and execution risks diverge sharply. As investors weigh the risks and rewards of high-growth AI stocks, the contrasting stories of these firms offer critical insights into the sector's dynamics.

Palantir: Scaling Profitability Amid Elevated Valuation Risks

Palantir Technologies has emerged as a poster child for AI-driven defense success. In Q3 2025, the company reported $1.18 billion in revenue, a 63% year-over-year increase, and raised its full-year revenue guidance to $4.4 billion from $4.17 billion, according to The Globe and Mail. This growth stems from a surge in U.S. commercial contracts, including a $2.76 billion total contract value backlog, and strong performance in its AI business, as noted in an Equiti note. Analysts have responded positively, with TipRanks' AI Analyst assigning a "Outperform" rating and a $200.00 price target.

However, Palantir's valuation remains a double-edged sword. Despite a 453x P/E ratio and a 54x P/B ratio in Q2 2025, the stock has surged +163% year-to-date, reflecting investor optimism about its AI-driven defense solutions. Yet this optimism hinges on the company's ability to scale free cash flow. A recent 4–6% post-earnings drop in after-hours trading, reported by a Blockonomi report, underscores market skepticism about whether Palantir can sustain its growth without diluting margins or overextending its balance sheet.

BigBear.ai: Operational Gains vs. Financial Headwinds

BigBear.ai, by contrast, faces a far more precarious path. The company's Q2 2025 results revealed a 18% revenue decline to $32.5 million and a $228.6 million net loss, forcing management to slash full-year revenue guidance to $125–140 million and abandon EBITDA targets, according to an Ad-hoc News report. With a $380 million backlog yet to convert into revenue, BigBear.ai's ability to execute on its pipeline will be tested when it reports Q3 results on November 10, 2025. Analysts expect $31.8 million in revenue and a $0.06 loss per share for the quarter, per a MarketBeat estimate, but the real focus will be on operational progress.

The company has made strides in defense partnerships, including the deployment of its veriScan™ biometric platform at Chicago O'Hare Airport and a strategic alliance with Tsecond to develop AI infrastructure for military applications. These moves signal potential in high-margin defense contracts. Yet without a clear path to profitability, BigBear.ai's stock remains a high-risk bet. Its beta of 2.5 and negative cash flow amplify exposure to market corrections, particularly if AI defense spending slows.

Valuation Volatility and Execution Risk: A Tale of Two AI Strategies

The divergent trajectories of Palantir and BigBear.ai highlight a broader tension in the AI defense sector: valuation optimism vs. execution realism. Palantir's $491.5 billion market cap reflects confidence in its established revenue streams and contract wins, but its multiples suggest little margin for error. A misstep in scaling AI solutions for defense clients could trigger a sharp re-rating.

BigBear.ai, meanwhile, trades at a discount to its peers but faces existential risks. Its $380 million backlog is a promise, not a guarantee, and its recent partnerships must translate into recurring revenue. The company's November 10 earnings report will be a litmus test for whether it can stabilize its financials while advancing its defense AI roadmap.

For investors, the key question is whether these firms can align their valuation multiples with execution outcomes. Palantir's strength lies in its ability to monetize AI at scale, while BigBear.ai's upside depends on converting its backlog into sustainable cash flow. Both, however, remain vulnerable to macroeconomic shifts and regulatory scrutiny in defense contracting.

Investor Considerations: Balancing Growth and Risk

The AI defense sector in 2025 is a high-stakes arena. Palantir's "Buy" ratings and guidance upgrades make it a compelling long-term play, but its valuation demands robust free cash flow growth to justify its multiples. BigBear.ai, while riskier, offers a speculative opportunity for investors willing to bet on its ability to execute on its defense partnerships and backlog.

As the November 10 earnings report approaches, BigBear.ai's ability to stabilize revenue and outline a credible path to profitability will be critical. For Palantir, the challenge lies in maintaining its momentum without overextending. In both cases, the intersection of AI innovation and defense spending will dictate whether these stocks remain in the crosshairs of growth-or become casualties of execution risk.