Graphics-chip expert NVIDIA (Nasdaq: NVDA) trounced Wall Street's targets in the just-reported first quarter and followed up with strong second-quarter guidance. A 42% earnings beat is nothing to sneeze at.

So why did the stock drop by as much as 10% on the news? I think the evidence points to overheated expectations.

NVIDIA traded up something fierce in the days leading up to this report, leaving the stock down by just 4% despite Friday's freefall. The afterglow of January's cross-licensing settlement with Intel (Nasdaq: INTC) has faded, and we're back to looking at NVIDIA's actual business model instead of artificial gains. And although the company is executing nicely at the moment, it's hard to see much upside for the rest of 2011.

As Gleacher analyst Doug Freedman puts it, "Investors need more growth avenues from current operations" to justify the current valuation. The company is in the midst of transforming from a pure-play graphics-chip wrangler into a mobile processor in the mold of Marvell Technology Group (Nasdaq: MRVL) or Qualcomm (Nasdaq: QCOM). This leaves the formerly all-important graphics division on the decline while the Tegra line takes its sweet time replacing the old bread-and-butter products, and investors are left merely guessing what's next.

Tegra 2 is the reference chip for the next generation of Android tablets, which sounds like a catalyst until you realize that Apple (Nasdaq: AAPL) has a complete stranglehold on that market so far. It's up to NVIDIA and its fellow Android pushers to change that, but it won't be easy -- and Tegra smartphones are few and far between.

You could pick up some NVIDIA shares on this drop if you believe in the transformation. This is a two-newsletter recommendation, so plenty of Fools might jump at this opportunity. Me, I'm not so sure. I do see it happening, but I'm in no rush to buy NVIDIA today. We'll see plenty more heart-stopping drops and daring climbs before this story plays out, and I think there will be better buy-in points.

Make sure you don't miss it when that happens. By adding NVIDIA to your Foolish watchlist, you'll be sure to catch the right wave when it comes in. This isn't exactly it, I'm afraid.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.