Graphics processing units (GPUs) have been Nvidia‘s (NASDAQ: NVDA) This business has been a bread and butter for a long, long time. The company initially made its name by making GPUs intended for use in personal computers (PCs) for gaming and content creation, before eventually striking gold with its data center GPUs that are now in high demand thanks to artificial intelligence (AI).
As it turns out, data center computing 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 (ending July 28). Revenue from the segment soared 162% year over year, accounting for 75% of the company’s top line. However, there’s another niche within the data center business where Nvidia is impressively gaining ground.
This particular business segment is now larger than Nvidia’s gaming business and could become a key growth driver for the company in the long term. Below, we take a closer look at this emerging business that could drive Nvidia’s growth.
Nvidia is making spectacular progress in this $80 billion market
Nvidia sells two types of data center chips. The first are GPUs, which already generate billions of dollars in revenue for the company every quarter. The second type of Nvidia data center chips are its networking chips, which are also selling like hotcakes, as shown in the company’s latest quarterly results.
Nvidia sold $3.7 billion worth of networking chips in the previous quarter, up 114% from the same quarter a year ago. The company’s networking revenue in the first half of the fiscal year came in at $6.8 billion, translating to an annual revenue run rate of nearly $14 billion. The global data center networking market is estimated to generate $37.6 billion in revenue this year. If Nvidia does indeed end fiscal 2025 with $14 billion in data center networking revenue, it would end up controlling 37% of this market.
What’s worth noting here is that Nvidia is reportedly growing at a faster pace than the data center networking space, which has received a major boost thanks to the advent of AI. According to market research firm Dell’Oro Group, the size of the data center switching market is likely to expand by 50% thanks to the growing need for switches deployed in back-end AI server networks.
The researcher estimates that spending on switches used in back-end AI servers will reach $80 billion over the next five years, which would be almost double the size of the current data center switch market. We’ve already seen that Nvidia enjoys a solid share of this market, and Dell’Oro points out the same. The research firm claims that the InfiniBand networking platform currently dominates the AI back-end networking market, and it’s 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 its customers. However, Dell’Oro notes 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 has already set its sights 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 networking performance by 1.6x compared to traditional Ethernet. Comments from Nvidia management on its August earnings conference call suggest that Spectrum-X has gained significant traction with customers. According to CFO Colette Kress: “Ethernet for AI revenue, which includes our Spectrum-X end-to-end Ethernet platform, doubled sequentially with hundreds of customers adopting our Ethernet offerings. Spectrum-X has broad market support from OEM and ODM partners and is being adopted by CSPs, GPU cloud providers, and enterprises including xAI to connect the world’s largest GPU compute cluster.”
A new multi-million dollar business in the making
Kress says Spectrum-X is “on track to start a multi-billion dollar product line within a year.” So it won’t be surprising to see Nvidia end up grabbing a sizable chunk of the data center networking market. The growth rate of Nvidia’s networking business means that it’s growing at a faster rate than the data center networking market right now, so it won’t be surprising to see it capture a larger portion of this space in the future.
But even if the company maintains its current market share of nearly 40% after five years, its annual networking revenue could reach $32 billion (based on the $80 billion market size previously projected). That would be a nice jump from the current $14 billion annual revenue run rate in the networking business.
Add to all this the optimistic outlook for 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 become even larger in the long term than it is now. Not surprisingly, analysts expect Nvidia’s profits to grow at an annual rate of more than 52% over the next five years.
That’s why investors looking to add AI stocks to their portfolios should consider buying Nvidia immediately, as it currently trades at 42 times forward earnings, a discount to the U.S. tech sector’s average price-to-earnings ratio of 45.
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Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool has positions in Nvidia and recommends it. The Motley Fool has a disclosure policy.
Prediction: This $80 Billion Market Could Be the Next Big Growth Driver for Nvidia Stock was originally published by The Motley Fool