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When the coming gains in a stock are obvious, watch out. Sure, its easy to envision more upside in Super Micro Computer (NASDAQ:SMCI) stock after its epic bull run. However, if short-term traders have already assumed the best-case scenario for Super Micro Computer, then they have already made the easy money and its time to take profits.

Some value-conscious investors point to Nvidia (NASDAQ:NVDA) stocks rally as a sign that the artificial intelligence market is too richly valued. Yet, theres evidence that Super Micro Computer is actually more overvalued than Nvidia. This doesnt mean you should short-sell Super Micro Computer stock, but cashing in some chips isnt a terrible idea.

Super Micro Computer has arrived, it seems. On March 18, the company officially joined the prestigious S&P 500large-cap stock index.

Of course, this event isnt just about prestige. Joining the S&P 500 means that a large number of index-fund holders will, in effect, own SMCI stock. Hence, some people might conclude that being an S&P 500 member will put a floor on the Super Micro Computer share price.

How did Super Micro Computer rise from a little-known server developer to an up-and-coming superstar? Without a doubt, the recent hype over AI played a role in Super Micro Computers ascendancies.

Just as theres a strong demand for Nvidias AI-compatible graphics processing units, theres also a demand Super Micro Computers AI-enabled servers.

Super Micro Computer can promptly manufacture and ship these servers. According to Rosenblatt Securities analyst Hans Mosesmann, Super Micro has developed a model that is quick to market.

Heres the problem. The highly efficient market already knows that Super Micro Computer is very, very quick to market.

Thus, I agree with Wells Fargo analyst Aaron Rakers warning that Super Micro Computer shares will be highly susceptible to any indications of tempering GPU-based server demand.

In other words, Super Micro Computer now has the daunting task of living up to the markets lofty server-demand expectations. And if you had valuation concerns about Nvidia, youll be shocked to see how richly valued Super Micro Computer is in 2024.

We can use a commonly cited metric to compare the two companies. Currently, Nvidias GAAP trailing 12-month price-to-earnings ratio is 73.63x. For comparison, the sector median P/E ratio is 29.55x.

Meanwhile, Super Micro Computers P/E ratio is 83.35x. Now, we can better understand what Rakers meant when he cautioned that SMCI stock is alreadydiscounting solid upside.

Many stock traders probably arent aware that Super Micro Computer is more richly valued than Nvidia. They might not know that Super Micro Computers market capitalization was only around $5 billion before November 2022, when OpenAI launched ChatGPT.

Today, Super Micro Computers market cap stands at approximately $60 billion. Going forward, it will be quite difficult for Super Micro Computer to maintain this pace of growth.

You may have recently discovered that Super Micro Computer can quickly assemble and sell its AI-enabled servers. Thats fine, but the market is already fully aware of Super Micro Computers advantages and growth potential.

Indeed, investing in Super Micro Computer is such an obvious move that an army of short-term traders have already done it. Just compare Super Micro Computers valuation and market cap to those of Nvidia, and youll see what Im talking about.

Consequently, the best thing to do right now is to take profits on SMCI stock if you already own it. And if youre looking to buy it, wait for a share price pullback of at least 25%.

On the date of publication, David Moadeldid 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.comPublishing Guidelines.

David Moadel has provided compelling content and crossed the occasional line on behalf of Motley Fool, Crush the Street, Market Realist, TalkMarkets, TipRanks, Benzinga, and (of course) InvestorPlace.com. He also serves as the chief analyst and market researcher for Portfolio Wealth Global and hosts the popular financial YouTube channel Looking at the Markets.

Excerpt from:

SMCI Stock: Why Chasing the 'Obvious' AI Play Could Leave You Burned - InvestorPlace