Whenever the path to significant stock gains seems “obvious,” tread cautiously. While it’s tempting to foresee further growth in Super Micro Computer (NASDAQ:SMCI) stock following its remarkable surge, it’s vital to note that quick profits often indicate an impending downturn.

Some prudent investors cite Nvidia (NASDAQ:NVDA) stock’s climb as a signal of overvaluation in the artificial intelligence sector. Surprisingly, evidence suggests that Super Micro Computer may be more overpriced than Nvidia. This doesn’t advocate for shorting SMCI stock, but it does warrant a prudent reappraisal of investments.

A Milestone Moment for SMCI Stock

Super Micro Computer seems to have finally hit a milestone. On March 18, the company officially became a part of the esteemed S&P 500 large-cap stock index.

However, this achievement signifies more than just prestige. Inclusion in the S&P 500 implies that a significant number of index funds will now hold SMCI stock. Consequently, some may believe that being an S&P 500 constituent will act as a safety net, shoring up the Super Micro Computer share price.

How did Super Micro Computer transform from a lesser-known server developer into a rising star? Undoubtedly, the recent AI frenzy played a crucial role in Super Micro Computer’s ascent.

Much like the clamor for Nvidia’s AI-compatible graphics processing units, there is also a demand for Super Micro Computer’s AI-infused servers.

Rosenblatt Securities analyst Hans Mosesmann affirms that “Super Micro has honed a rapid go-to-market strategy.”

Evaluating Super Micro Computer’s Price Tag

Herein lies the challenge. The astute market is well aware of Super Micro Computer’s swift market penetration.

Hence, I concur with Wells Fargo analyst Aaron Rakers’ caution that Super Micro Computer’s “shares are extremely susceptible to any signals of waning GPU-based server demand.”

In essence, Super Micro Computer faces the daunting prospect of matching the market’s towering server demand projections. If you harbored concerns about Nvidia’s valuation, the comparison with Super Micro Computer’s rich 2024 valuation will enlighten you.

Let’s juxtapose the two companies using a conventional metric. Presently, Nvidia’s GAAP trailing 12-month price-to-earnings ratio stands at 73.63x. For context, the sector median P/E ratio lingers at 29.55x.

On the flip side, Super Micro Computer’s P/E ratio stands at a hefty 83.35x. This elucidates Rakers’ observation that SMCI stock is “already predicting substantial upside.”

Many traders may be oblivious to Super Micro Computer’s loftier valuation relative to Nvidia. They might not be aware that before November 2022, Super Micro Computer boasted a market capitalization of only about $5 billion before OpenAI introduced ChatGPT.

Currently, Super Micro Computer’s market cap hovers around $60 billion. Maintaining this growth pace will be quite the challenge moving forward.

SMCI Stock: Foregoing the ‘Obvious’ Move

While it may seem evident that Super Micro Computer swiftly produces and sells its AI-enhanced servers, the market is well-informed of the company’s strengths and growth potential.

Indeed, investing in Super Micro Computer appears so “obvious” that a wave of short-term traders has already embraced it. A comparison of Super Micro Computer’s valuation and market cap against Nvidia’s should shed light on this.

Consequently, the prudent course of action now is to secure profits on SMCI stock if already held. For prospective buyers, patiently await a share price decline of at least 25%.

On the date of publication, David Moadel did not have (either directly or indirectly) any positions in the securities mentioned in this article. The viewpoints expressed in this article are of the author’s and adhere to the InvestorPlace.com Publishing Guidelines.