Nvidia (NASDAQ:NVDA) is positioned as the premier artificial intelligence play, particularly after last year’s dramatic tripling in value. Yet investors wonder how much higher Nvidia stock can go.

Yet they are also concerned about its valuation. When Super Micro Computer (NASDAQ:SMCI) underwhelmed the market with its earnings report, Nvidia stock tumbled in sympathy.

That suggests we may be nearing a top. Although NVDA stock has recovered much of the lost ground since it hasn’t hit a new high and volatility may increase.

Investors should set their sights on May 22. That’s when Nvidia reports its fiscal first-quarter earnings. It could be a make-or-break moment.

As with Super Micro whose report was actually quite good and barely missed Wall Street’s elevated sales forecast, the market sent the stock plunging. Let’s see what’s in store for Nvidia later this month.

Nvidia Stock Pops

Nvidia generated $60.9 billion in sales in 2023 and $29.8 billion in net profits, increases of 126% and 581%, respectively. Yet revenue really didn’t go parabolic until the fourth quarter when it generated over $22.1 billion in sales. 

Management is guiding toward $24 billion in first-quarter sales while maintaining gross margins between 76% and 77%. It’s obvious Nvidia isn’t expecting growth to slow anytime soon.

With good reason. The data center segment is its biggest revenue generator and demand for custom accelerators is, well, accelerating. The rapid innovation in AI and its deployment throughout corporate infrastructure is forcing the construction of large warehouses to store the advanced and complex power the technology needs.

Nvidia is the undisputed king of data center graphics processing units. Earlier this year, Wells Fargo estimated Nvidia owned 98% of the market. However, that was expected to drop to between 94% and 96% as rivals Advanced Micro Devices (NASDAQ:AMD) and Intel (NASDAQ:INTC) brought their own chips to market.

Because the market is growing so fast, even the loss of a few percentage points is not worrisome for investors. Nvidia is still a giant fish in a growing pond. As CEO Jensen Huang noted last quarter, “Accelerated computing and generative AI have hit the tipping point.”

Highs Get Higher

Yet if we look to Super Micro for guidance, its own revenue tripled while per-share profits quadrupled. And yet the market still wasn’t happy because it missed projections by what was essentially a rounding error.

That is the problem when investing in stocks that are rapidly scaling up. Even the slightest perceived miscue can cause shares to crumble. Super Micro hasn’t returned to its pre-earnings level let alone its all-time high.

Nvidia trades at 75 times trailing earnings and 29 times next year’s estimates. It also goes for 37 times sales and 83x free cash flow. The chipmaker is priced for perfection. The question is whether it can deliver impeccable results. Maybe not.

Previously, supply of Nvidia’s data center GPU, the high-end H100, was tightly constrained. It caused pricing to soar, further padding the chipmaker’s bottom line. But it also lost out on some business as a result. However, the situation has since changed.

Industry reports say the availability of the H100 is much smoother now. Taiwan Semiconductor Manufacturing (NYSE:TSM), from where Nvidia gets its AI chips, is expanding capacity.

There is also the appearance of competitive chips from AMD and Intel that offer similar capabilities, performance and support. Pricing will begin to rationalize now, which could erode Nvidia’s margin power.

A Fall Ahead?

There seems little doubt Nvidia will report a monster quarter in two weeks. Sales will be gigantic and profits possibly more so.

Yet investors need to watch whether the market is adjusting to such a degree that Nvidia’s stock will be affected. Very recent history suggests it will.

The chipmaker is still positioned to be a long-term winner, but I don’t think buying in at these levels is prudent. Waiting for the inevitable overreaction from the market before picking up this stock might be the wiser choice.

On the date of publication, Rich Duprey did not hold (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.