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What happened

Though C3.ai's (AI -10.82%) leadership team made multiple optimistic pronouncements during an investor day update Thursday evening, shares of the artificial intelligence company were trading down by 10.6% as of 12:45 p.m. ET Friday.

Citing "broad interest in AI" across industries, CFO Juho Parkinnen said the company's pipeline of new contracts in the works has "basically doubled" since the beginning of its fiscal year. At the same time, management said the "sales cycle is shortening" on these opportunities, with prospects turning into contracts at a faster rate, reports TheFly.com.

So far, so good, right? But if this is the case, then why did C3.ai stock slump Friday?

According to the CFO, at this time last fiscal year, C3.ai had successfully landed 10 deals with prospective clients, whereas so far this fiscal year, the company has landed 16 deals. Problem is, as investment bank JP Morgan points out, most of these deals are for pilot projects, and not full-fledged, long-term contracts. The bank wants to see how many of these pilot projects turn into longer contracts so it can determine how accurate "the assumptions around the consumption-based pricing model" are.

Similarly, investment bank DA Davidson wrote Friday that it's pretty sure C3.ai's success in landing pilot projects is already reflected in the stock's price -- which, after all, has roughly tripled since the start of this year.

DA Davidson isn't coming right out and saying that it thinks C3.ai stock is overpriced, mind you. However, it reiterated the $30 price target that it put on the stock early this month. Given that C3.ai is trading at around $33, that's kind of the same thing, and suggests a downgrade may be imminent -- though it did maintain its neutral rating.

Given that the company has no profits and trades at more than 15 times sales, there's a lot of hype built into C3.ai's valuation right now. Discretion may be the better part of valor on this one, folks. Until C3.ai proves that it can turn its pilot deals into long-term contracts, and its long-term contracts into sustainable profits, invest in it at your own risk.

JPMorgan Chase is an advertising partner of The Ascent, a Motley Fool company. Rich Smith has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends JPMorgan Chase. The Motley Fool recommends C3.ai. The Motley Fool has a disclosure policy.

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Why C3.ai Stock Crashed by 10% on Friday - The Motley Fool