The graphics processing unit (GPU) has Nvidia‘s (NASDAQ: NVDA) bread-and-butter business for a long, long time. The company initially made its name producing GPUs intended for deployment on personal computers (PCs) for gaming and content creation, before finally striking gold with data center GPUs that are now in 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 of data center GPUs in the second quarter of fiscal 2025 (which ended on July 28). The segment’s revenue grew 162% year over year, accounting for 75% of the company’s top line. However, there is another niche in the data center business where Nvidia is currently gaining excellent traction.
This particular segment of the business is currently larger than Nvidia’s gaming business, and may be a key growth driver for the company in the long term. Here’s a closer look at this growing business that could fuel Nvidia’s growth.
Nvidia is making good progress in this $80 billion market
Nvidia sells two types of data center chips. The first is the GPU, which has generated billions of dollars for the company every quarter. The second type of Nvidia data center chip is the network chip, which is also selling like hotcakes according to the company’s latest quarterly results.
Nvidia sold $3.7 billion in network chips in the previous quarter, up 114% from the same quarter last year. The company’s network revenue in the first half of the fiscal year was $6.8 billion, bringing its annual revenue rate to nearly $14 billion. The global data center networking market is expected to generate $37.6 billion this year. If Nvidia actually ends fiscal 2025 with data center network revenue of $14 billion, it will control 37% of this market.
What’s worth noting here is that Nvidia is reportedly growing faster than the data center networking space, which is getting a major shot in the arm 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 increase by 50% due to the need for switches that are widely used in back-end AI server networks.
Researchers see spending on switches used in back-end AI servers reaching $80 billion over the next five years, nearly doubling the size of the current data center switch market. We have seen that Nvidia is very happy in this market, and Dell’Oro shows the same. The research firm says that the InfiniBand network platform currently dominates the market for AI back-end networks, and it should be noted that Nvidia offers network products based on this network communication standard.
Nvidia sells InfiniBand adapters, switches, data processing units (DPUs), routers, gateways, cables, and transceivers to customers. Dell’Oro, however, indicated that the Ethernet-based network standard could eventually overtake the InfiniBand standard in the next few years. The good news for Nvidia investors is that Nvidia has set its sights on an Ethernet AI networking platform.
It claims that the Spectrum-X network platform is the world’s first Ethernet network platform for AI and can accelerate AI network performance by 1.6x when compared to traditional Ethernet. Nvidia management’s comments on its August earnings conference call indicated that Spectrum-X is gaining traction among customers. According to CFO Colette Kress: “Ethernet for AI revenue, which includes our end-to-end Ethernet platform Spectrum-X, doubled with hundreds of customers using our Ethernet offering. Spectrum-X has broad market support from OEM and ODM partners and adopted by CSPs, GPU cloud providers, and enterprises, including xAI to connect the world’s largest GPU computing clusters.”
A new multibillion-dollar business in the making
Kress said Spectrum-X is “well on track to launch a multibillion-dollar product line within a year.” So, it’s no surprise that Nvidia has finally cornered a large portion of the data center networking market. The growth rate of Nvidia’s networking business means it’s growing faster than the current data center networking market, so it wouldn’t be surprising to see it gain a larger share of the market in the future.
But even if the company holds the current market share of almost 40% after five years, the annual network revenue could reach $32 billion (based on the $80 billion market size projected earlier). This would be a great jump from the current annual revenue level of $14 billion in the network business.
Throw in the rosy outlook of the overall AI chip market, which is expected to generate $311 billion by 2029, and it wouldn’t be surprising if Nvidia’s data center business turns out to be bigger in the long run than it is now. . Not surprisingly, analysts expect Nvidia’s earnings 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 outright because it’s currently trading at 42 times forward earnings, a discount to the US 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 a position and recommends Nvidia. 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
