C3.ai Shifts From Subscription To Consumption Model, Analysts Highlight Massive Addressable Market Opportunity

Last week, analysts spoke with C3.ai, Inc AI management at the AI Defense Forum. They listened to speakers from the U.S. Department of Defense and industry consultants regarding the need to speed up deployments of AI to position the U.S. against its adversaries better. 

Needham analyst Mike Cikos reiterated a Hold following the company's announcement that it would shift from a Subscription model to a Consumption model. Historically, these transitions have been difficult to navigate from an execution standpoint. 

Revenue is depressed near-term as new customers are onboarded, and it typically takes 3-4 quarters to ramp consumption levels. Meanwhile, Profitability suffers as the operating expenditure base continues to build customer success initiatives. The net impact is a dim view of how C3 AI emerges from the transition.

Cikos writes that "thawing the frozen middle" best describes the DoD's current situation. The top brass is 'enlightened' and understands the need for embracing AI, while recruits are 'digital-native' and 'data-literate.'

The hold-up has been mid-level leadership's process orientation, which has been resistant to AI - although this stance is becoming less tenable in the current geopolitical environment. Cikos believes C3 has made progress in melting Beltway gridlock on multiple fronts, but there remains more to do.

JMP Securities analyst Patrick Walravens maintained a Buy rating and set a price target of $25.00. While the road has been bumpy for C3, Walravens likes the long-term opportunity at C3 for several reasons.

C3 has built an effective, scalable enterprise AI solution that solves problems with a significant economic impact in various industries. The addressable market opportunity is massive, estimated at $191 billion in 2021.

CEO Tom Siebel is an experienced technology executive and likely to eventually navigate C3 to a good outcome for investors, as was the case with Siebel Systems. Walravens highlighted that it took steps to adjust to the current environment.

The valuation was attractive. Walravens reiterated his FY23, FY24, and FY25 non-GAAP EPS estimates.

Price Action: AI shares traded higher by 1.26% at $15.21 on the last check Monday.