Nvidia (NVDA 1.44%) has turned out to be a top performer on the stock market this year so far. The stock has gained 57%, driven by the company's better-than-expected fiscal 2023 fourth-quarter results (for the three months ended Jan. 29, 2023), which were released on Feb. 22.

Investors have chosen to focus on the semiconductor giant's progress in data centers and the artificial intelligence (AI) opportunity that could supercharge its growth in the long run. However, they seem to be ignoring a potential speedbump that could bring Nvidia's rally to a halt (at least in the short run) -- the gaming business.

Let's see why the gaming business has the potential to wreck this semiconductor stock's terrific momentum.

Weak graphics cards sales led to an alarming inventory buildup

Sales of personal computers (PCs) were down 16.5% in 2022, according to IDC, and this weighed heavily on Nvidia's gaming business during the year. The company's gaming revenue plunged 27% in fiscal 2023 to $9 billion. Additionally, Nvidia's professional visualization revenue fell 27% year over year to $1.54 billion thanks to weak sales of graphics cards used in workstations. That's not surprising, as sales of discrete graphics cards fell to 38 million units in 2022 from 49 million units the year before.

But the impact of weak graphics card demand wasn't limited to just Nvidia's top line. The company recorded "$2.17 billion of inventory charges largely relating to excess supply of NVIDIA Ampere architecture Gaming and Data Center products as compared to the demand expectations for these products."

In short, Nvidia had to write down the value of its unsold inventory last fiscal year as its market value fell below the book value. Again, that's not surprising given that the company was resorting to price cuts in a bid to boost graphics card sales in 2022. The inventory charges that Nvidia recorded last fiscal year took a heavy toll on the company's earnings.

That's evident from the fact that Nvidia's adjusted earnings fell 25% year over year in fiscal 2023 to $3.34 per share even though its revenue remained flat. The inventory write-downs led to a contraction of 7.6 percentage points in Nvidia's adjusted gross margin last year to 59.2%. The bad news for Nvidia is that it is still sitting on a lot of unsold inventory, as the chart below shows.

NVDA Inventories (Quarterly) Chart

NVDA Inventories (Quarterly) data by YCharts

What's more alarming is the fact that the company's inventory levels have been rising at a faster pace than its revenue over the past four quarters. In fact, Nvidia's inventory level has increased substantially, while its top line has been heading south.

NVDA Inventories (Quarterly) Chart

NVDA Inventories (Quarterly) data by YCharts

The above chart is an indication of Nvidia's inability to sell the graphics cards that it is producing, which can be attributed to the PC market's weakness. CFO Colette Kress pointed out on the company's February earnings conference call that the inventory correction "is largely behind us," so investors can expect an improvement in sales of graphics cards going forward.

But at the same time, investors shouldn't forget that Nvidia is sitting on a lot of unsold inventory that it must move first, and that could turn out to be difficult given the PC market forecast for 2023. IDC is anticipating another weak year for PCs in 2023, anticipating a 10.7% drop in shipments this year. So Nvidia may not have enough room to move its unsold inventory, as the weakness in the PC market could be here to stay.

Nvidia's expensive valuation is another problem

Analysts anticipate a turnaround in Nvidia's fortunes this fiscal year. According to consensus estimates, Nvidia's revenue is forecast to increase by 9% in fiscal 2024 to $29.5 billion, while adjusted earnings are expected to jump to $4.46 per share from last year's $3.34 per share.

But the gaming business produced a third of Nvidia's overall revenue last fiscal year. So weak graphics card sales and high inventory levels could continue weighing on Nvidia's performance this fiscal year, and that could keep the company from meeting Wall Street's growth targets. That's why investors who are looking to buy Nvidia stock right now considering its latest rally may want to hold off from doing so, especially considering its steep valuation.

The semiconductor stock is trading at a whopping 132 times earnings right now. That's more than double its five-year average earnings multiple of 59 and the Nasdaq-100's earnings multiple of 24, which means that if Nvidia fails to live up to Wall Street's expectations, the stock could be in trouble.