In light of Booz Allen Hamilton’s (BAH) significant exposure to the quickly growing fields of cybersecurity and AI, the defense contractor appears to be poised to succeed going forward. And as shown by the firm’s rapidly increasing revenue and profits, it is already performing quite well.
Meanwhile, the valuation of the company’s stock is attractive.
Booz Allen’s High Exposure to Cybersecurity
The contractor predicts that its cybersecurity business will generate $2.5 billion to $2.8 billion of sales during fiscal 2025, which is its current fiscal year. Booz Allen is also seeking to double its cybersecurity revenue in the next five years, and the company’s cybersecurity practice is staffed by over 5,000 professionals.
Boding well for its ability to reach its cybersecurity revenue target, the company in August obtained a three-year task order from the Cybersecurity Infrastructure Security Agency (CISA) that could be worth up to $1.2 billion. The agreement will generate at least $421 million of sales for Booz Allen.
Under the deal, the firm will continue to help CISA implement its continuous diagnostics and mitigation (CDM) DEFEND program. DEFEND seeks to protect government agencies from cyberattacks.
Although Booz Allen has worked on CDM since 2014, the new deal will provide the company with higher potential annual payments than its previous contract with CISA.
That’s because in 2018 Booz Allen received two six-year orders to assist with CISA’s CDM program that provided Booz Allen with a combined ceiling of $1.6 billion of revenue. That works out to total possible annual revenue of $267 million.
Conversely, under the new order, the firm’s mean average annual ceiling revenue is $400 million.
The average annual potential total of the new deal is higher partly because, under the latest contract, Booz Allen will start providing “incident support” for “zero-trust solutions” for the first time.
Further, Booz Allen stated in a September presentation that it had obtained over 1,000 deals to provide incident response cybersecurity services for the top 2,000 companies in the world during its current fiscal year.
Additionally, the firm reported that it had about 290 active cybersecurity contracts with the federal government. And finally, it noted that about 26% of its contracts worth over $100 million annually include one or more cybersecurity components.
Booz Allen’s AI Business Has Great Potential
In Booz Allen’s fiscal 2024, the firm generated about $600 million of revenue from AI. That equates to about 5.6% of its revenue for the year.
But multiple, positive catalysts are likely to increase the latter figures meaningfully. In March 2024, the White House published AI guidelines that push agencies to use the technology more extensively while implementing protective measures.
And Rozanski, Booz Allen’s CEO, reported in May that almost every agency is looking to harness the power of AI, and he predicted that the company’s overall annual revenue from the technology would reach $1 billion within the next two years.
Meanwhile, the firm is implementing multiple, impressive AI projects. For example, in July, it deployed a large language model (LLM) in space.
Designed to assist astronauts on the International Space System with “maintenance and repair” activities, the LLM represents “the first generative AI tool in space,” Booz Allen believes. The firm’s pioneering work in this area could enable it to obtain many more space-based AI deals going forward, since it will probably face relatively little competition for such contracts for some time.
And in April, Booz Allen unveiled aiSSEMBLE Baseline, an open-source version of the firm’s aiSSEMBLE product. The company noted that aiSSEMBLE Baseline is designed to “dramatically simplify the engineering and deployment of AI systems.”
Geared for government agencies, aiSSEMBLE Baseline reportedly utilizes “ a series of reusable, flexible and extensible software components.” According to Booz Allen, aiSSEMBLE Baseline allows entities to use multiple vendors and easily enlarge the number of individuals using the system.
aiSSEMBLE Baseline is likely to enable agencies to implement and adapt AI to their needs rather smoothly. As a result, the number of departments adopting the system could surge a great deal in the long term.
Such a development, in turn, may open the door for Booz Allen to sell its other AI products and services to the product’s new users. Consequently, the firm’s revenue from its AI offerings could jump a great deal down the road.
Booz’s Strong Financial Results and Relatively Low Valuation
In the company’s fiscal second quarter that ended in September, its revenue jumped 18% versus the same period a year earlier to $3.15 billion, while its net income, excluding certain items, soared 38% year-over-year to $233 million. Booz Allen now expects its revenue to climb 11% to 13% during fiscal 2025, up from its previous outlook for an 8% to 11% increase.
The company’s forward price-to-earnings ratio is 20., meaningfully below the median P/E ratio of the industrials sector which is 23.77. Additionally, its forward price/Earnings-to-Growth (PEG) ratio of 1.8 is below the sector median of 1.94. The PEG ratio, as the name implies, is a measure of valuation that takes a company’s growth outlook into account.
