AI Is Necessary But Time-Consuming Model Transition, Analyst Says While Downgrading

  • Needham analyst Mike Cikos downgraded, Inc AI to Hold from Buy and removed his last $20 price target.
  • C3.AI announced a shift toward a Consumption model alongside its earnings. Management expects to weigh on near-term revenue before achieving escape velocity as more customers are onboarded and the usage-based flywheel takes hold.
  • Cikos called the company's shift toward a consumption model announced alongside its earnings report "necessary but time-consuming" as C3's "elephant-hunting" for up to $50 million deals falls flat in the macro environment. 
  • Still, a pivot in monetization is "challenging, time-consuming and requires a re-think throughout the entire organization," contends Cikos.
  • Revenue is depressed near-term as new customers are onboarded, and it typically takes 3-4 quarters to ramp consumption levels, he noted.
  • Meanwhile, profitability suffers as the operating expenditure base builds customer success initiatives. 
  • The net impact is a dim view of how C3 AI emerges from the transition, allowing confusion in the market concerning what denominator investors should use for their EV/Sales calculation and what multiple to assign. At the same time, he awaits more evidence of C3's durable growth post-transition, Cikos added.
  • Price Action: AI shares traded higher by 0.24% at $14.49 on the last check Friday.
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