Graphics processing units (GPUs) have been created. Nvidia‘s (NASDAQ: NVDA) Intel has been in the bread and butter business for a very long time. Initially, the company made its name by producing graphics processing units (GPUs) for use in gaming and content creation PCs, before eventually gaining fame with its data center GPUs, which are now in high demand thanks to artificial intelligence.
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 (which ended July 28). Revenue from the segment was up 162% year over year, accounting for 75% of the company’s total revenue. However, there’s another niche within the data center business where Nvidia is now gaining impressive traction.
This business segment is now larger than Nvidia’s gaming segment, and it could prove to be a major growth driver for the company in the long term. Here’s a closer look at this emerging business segment that could fuel Nvidia’s growth.
Nvidia makes huge advances in $80 billion market
Nvidia sells two types of data center chips. The first is graphics processing units, which already generate several billion dollars in revenue for the company each quarter. The second type of data center chips Nvidia makes is networking chips, which are also selling like hot cakes, as the company’s latest quarterly results show.
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 was $6.8 billion, which translates into annual revenue of about $14 billion. The global data center networking market is expected to generate $37.6 billion in revenue this year. If Nvidia ends fiscal 2025 with $14 billion in data center networking revenue, it will end up controlling 37% of the market.
It is worth noting here that NVIDIA is growing faster than the data center networking space, which has been boosted by the rise of AI. According to market research firm Dell’Oro Group, the data center switching market is likely to expand by 50% due to the growing need for switches used in AI backend server networks.
The researcher expects spending on switches used in back-end AI servers to reach $80 billion over the next five years, roughly double the size of the current data center switch market. We’ve already seen Nvidia have a strong share of this market, and Dell’Oro points to the same thing. The research firm says its InfiniBand networking platform currently dominates the back-end AI networking market, and it’s worth noting that Nvidia offers networking products based on this networking communications standard.
Nvidia sells InfiniBand switches, adapters, data processing units, routers, gateways, cables, and transceivers to customers. However, Dell’Oro points out that the Ethernet-based networking standard could eventually overtake InfiniBand in the next few years. The good news for Nvidia investors is that Nvidia already has its sights set on an Ethernet AI networking platform.
The Spectrum-X networking platform is claimed to be the world’s first Ethernet networking platform for AI and is capable of accelerating AI networking performance by 1.6 times when compared to traditional Ethernet. Nvidia management comments on August Earnings Conference Call Spectrum-X is forecast to gain tremendous popularity among customers. According to CFO Colette Kress: “Ethernet AI revenue, which includes the comprehensive Ethernet platform Spectrum-X, has 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 computing cluster.”
New multi-billion dollar business venture in the works
Spectrum-X is “on track to start a multi-billion dollar product line within a year,” Chris says. So it wouldn’t be surprising to see Nvidia eventually corner a significant portion of the data center networking market. Nvidia’s networking business is growing at a faster rate than the data center networking market right now, so it wouldn’t be surprising to see it capture a larger share of this space in the future.
But even if the company maintains its current market share of about 40% after five years, its annual networking revenue could reach $32 billion (based on a previously projected market size of $80 billion). That would be a big jump from the current annual revenue rate of $14 billion in the networking sector.
Add to that the optimistic outlook for the overall AI chip market, which is expected to generate $311 billion in annual revenue in 2029, and it wouldn’t be surprising to see NVIDIA’s data center business grow even bigger in the long run. It’s no surprise that analysts are forecasting 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 shares right away, 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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Harash Chauhan The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a position in and recommends Nvidia. The Motley Fool has Disclosure Policy.
Prediction: This $80 Billion Market Could Be Nvidia’s Next Big Growth Driver Originally posted by The Motley Fool
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