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Graphics processing units (GPUs) have been Nvidia‘S (NASDAQ: NVDA) bread-and-butter business for a long, long time. The company initially made a name for itself producing GPUs intended for use in personal computers (PCs) for gaming and content creation, before eventually striking gold with its data center GPUs which are now in huge demand thanks to artificial intelligence (AI).
It turns out that data center computer chips now generate the majority of Nvidia’s revenue. The company sold $22.6 billion worth of data center GPUs in the second quarter of fiscal 2025 (which ended July 28). The segment’s revenue increased 162% year over year, accounting for 75% of the company’s revenue. However, there is another niche within the data center sector where Nvidia is now gaining impressive traction.
This particular business segment is now bigger than Nvidia’s gaming business, and it could prove to be a major growth driver for the company in the long run. Here’s a closer look at this emerging company that could boost Nvidia’s growth.
Nvidia is making tremendous progress in this $80 billion market
Nvidia sells two types of data center chips. The first is GPUs, which already generate several billion dollars in revenue for the company every quarter. The second type of Nvidia’s data center chips are its networking chips, which are also selling like hotcakes, as evidenced by the company’s latest quarterly results.
Nvidia sold $3.7 billion worth of networking chips in the previous quarter, an increase of 114% compared to the same quarter last year. The company’s network revenue was $6.8 billion in the first half of the fiscal year, translating into annual revenue of nearly $14 billion. The global data center networking market is estimated to generate $37.6 billion in revenue this year. If Nvidia indeed ends fiscal 2025 with $14 billion in data center network revenue, it would ultimately control 37% of this market.
What’s worth mentioning here is that Nvidia is reportedly growing faster than the data center networking space, which has seen a major boost thanks to the advent of AI. According to market research firm Dell’Oro Group, the size of the data center switch market is likely to increase by 50% due to the growing need for switches deployed in back-end AI server networks.
The researcher expects spending on switches used in back-end AI servers to reach $80 billion over the next five years, which would be nearly double the current data center switch market. We’ve already seen that Nvidia has a solid market share, and Dell’Oro points to the same. The research firm says that the InfiniBand networking platform currently dominates the AI back-end networking market, and it is worth noting that Nvidia offers networking products based on this network communications standard.
Nvidia sells InfiniBand adapters, switches, data processing units (DPUs), routers, gateways, cables and transceivers to customers. However, Dell’Oro points out that the Ethernet-based networking standard could eventually overtake the InfiniBand standard in the coming years. The good news for Nvidia investors is that Nvidia already has its sights set on the Ethernet AI networking platform.
It claims its Spectrum-X networking platform is the world’s first Ethernet networking platform for AI and is capable of accelerating AI network performance by 1.6x compared to traditional Ethernet. Nvidia management’s comments about the August earnings conference call suggest that Spectrum-X has gained tremendous traction among customers. According to CFO Colette Kress: “Ethernet for AI revenues, including our Spectrum-X end-to-end Ethernet platform, have doubled sequentially, with hundreds of customers adopting our Ethernet offering. Spectrum-X has broad market support from OEMs and ODM partners and is used by CSPs, GPU cloud providers and enterprises, including xAI, to connect the largest GPU computing cluster in the world.”
A new billion-dollar business in the making
Kress says Spectrum-X is “on track to launch a multi-billion dollar product line within a year.” So it should come as no surprise that Nvidia will eventually gain a significant share of the data center networking market. The growth rate of Nvidia’s networking business means that it is currently growing faster than the data center networking market. Therefore, it won’t be surprising to see Nvidia capture a larger share of this space in the future.
But even if the company maintains its current market share of almost 40% after five years, annual network revenues could reach $32 billion (based on the previously forecast market size of $80 billion). That would be a nice jump from the networking industry’s current annual revenue of $14 billion.
Add to that the rosy prospects of the overall AI chip market, which is expected to reach $311 billion in annual revenue by 2029, and it won’t be surprising to see Nvidia’s data center business grow even bigger in the long term than it is now already are. . Not surprisingly, analysts expect Nvidia’s revenues to grow by more than 52% annually over the next five years.
That’s why investors looking to add an AI stock to their portfolios should consider buying Nvidia right away, as it currently trades at 42 times forward earnings, a discount to the average price-to-earnings ratio of 45 in the American technology sector.
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Hard Chauhan has no position in any of the stocks mentioned. The Motley Fool holds positions in and recommends Nvidia. The Motley Fool has one disclosure policy.
Prediction: This $80 billion market could be the next big growth driver for Nvidia stock was originally published by The Motley Fool