Appian (APPN) is facing a demanding and challenging market environment for seat-based models amid artificial intelligence-related concerns, Morgan Stanley said in a note Thursday.

The concerns center on AI potentially weighing on seat growth and AI-native competition, the investment firm said. Overcoming these could require the company to accelerate revenue, monetize AI capabilities through higher subscription tiers, and transition to a hybrid pricing model, Morgan Stanley said.

In addition, the application software group continues to see a challenging investment setting as more investors prefer AI monetization rather than underwriting long-term growth, the investment firm added.

Appian is positioned to deliver solid Q1 results, along with a "modest" outlook raise, but this is "unlikely to resolve the broader debate weighing on the stock," the firm said. Appian is set to report its Q1 financial results on May 7.

Morgan Stanley downgraded Appian to equal-weight from overweight and lowered the price target to $25 from $41.

Shares of Appian were down more than 5% in Thursday trading.

Price: 20.57, Change: -1.16, Percent Change: -5.32