Nvidia (NASDAQ:NVDA) has undoubtedly been one of the most debated stocks of 2023, if not the most debated one. That’s largely due to its gargantuan market capitalization exceeding $1 trillion, on sales of just over $13.5 billion in its latest reported quarter. Of course, what matters for a growth stock is not current sales but future potential. Thus, Nvidia’s future largely depends on the growth trajectory of AI and the company’s execution.

What isn’t debated is the tremendous rally over the past year and a half, which has tripled Nvidia’s valuation from its trough. However, this rally hasn’t sustained itself recently, with NVDA stock trading sideways of late. Many investors now doubt the company’s upside potential given the many “ifs” around Nvidia’s valuation, and the long-term growth investors can associate with AI.

NVDA Stock: The Real Question

The core question isn’t around Nvidia as a business, but whether AI has become a multi-trillion dollar industry this decade (beyond just conversational models to help white-collar workers). Nvidia’s fate depends on constant massive spending on its expensive AI chips from data centers and enterprises honing in on this trend.

The issue is most AI companies are unprofitable financial black holes without a clear path to profitability. If the hype around AI dries up, funding would likely be squeezed for these startups, forcing them to drastically reduce spending and reuse older generations of AI chips. That would directly hurt Nvidia’s growth trajectory and margins.

Moreover, competitors like Advanced Micro Devices (NASDAQ:AMD) and Intel (NASDAQ:INTC) already have very capable AI chips on the market. While AMD and Intel’s offerings may not be the absolute best yet, they can offer compelling options for AI startups and researchers looking to cut costs if they face funding crunches or economic pressures. Many experts believe AMD could catch up or even surpass Nvidia in terms of capabilities over the long-run.

In the Near-Term, Nvda Looks Set to Plateau After Its Monstrous Rally

Personally, I believe NVDA stock is set to plateau in the short-to-medium term after its parabolic rally. There is simply too much speculation baked into the company’s trillion-dollar valuation to justify further near-term upside. Perhaps Nvidia will continue beating estimates and raising guidance, theoretically justifying its lofty valuation within the next few years, once clarity around AI’s growth path and the company’s total addressable market arrives.

However, even in the most bullish scenarios, a $1 trillion market capitalization seems to be too high. Indeed, that’s a hefty valuation factoring in a tremendous amount of future cash flow, before we have concrete evidence and metrics around the real-world traction and quantifiable total addressable AI will have in various markets and industries.

Nvidia has a proven track record of defying naysayers and bears. But prudent investors should wait for real-world confirmation of the AI hype translating into sustained revenues and market share, before chasing this high-flying stock.

Competitors May Be Closing the Gap While Demand Could Slip if AI Hype Fizzles

Considering Nvidia’s steep valuation, any minor stumbles or disappointments could lead to an ugly correction. Additionally, competitors like AMD are not standing still. They aim to challenge Nvidia’s AI computing dominance over the next decade.

Moreover, Nvidia’s growth depends on massive data center spending that could evaporate if the hype cycle around AI cools off before real monetizable applications are developed at scale beyond research projects. The crypto boom provided a major tailwind that boosted sales of Nvidia gaming cards over the past several years – that’s an example of a tailwind that turned into a headwind real quick.

While Nvidia has real cutting-edge AI technology and capabilities, there are still open questions about whether enterprise and data center customers will continue purchasing its pricey AI chips at the same frenzied pace if economic and funding conditions tighten. Essentially, NVDA stock appears to be priced for AI perfection.

My Verdict: Hold Nvda if You Already Own It, but Don’t Chase the Hype

In summary, my viewpoint is that NVDA stock seems to be overheated in the short-term, despite having promising long-term prospects. Naturally, I wouldn’t recommend selling NVDA stock at these levels, for investors who already own shares. However, I also think that aggressively building a position at more than $400 per share isn’t a good move, either. Thus, this stock’s risk/reward skews to the downside near current prices, in my opinion.

Of course, if you’re a long-term investor with a 5-10-year time horizon, gradually accumulating NVDA stock on pullbacks and dips could pay off handsomely. Just brace for some turbulence on the runway before takeoff.

In my view, NVDA stock is a hold here. The AI and metaverse growth story remains intact, but patience and caution are prudent, given apparent headwinds. Long-term investors can prudently buy NVDA stock for the future, but expect some gut-wrenching volatility beforehand if macro conditions deteriorate.

On the date of publication, Omor Ibne Ehsan did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.