Graphics processing units (GPUs) have been Nvidia‘s (NASDAQ: NVDA) bread-and-butter business for an prolonged, very very long time. The company initially made its name producing GPUs meant for deployment in personal computers (PCs) for gaming and content creation, before eventually striking gold with its data center GPUs which is perhaps now in red-hot demand resulting from artificial intelligence (AI).
Since it seems, data center compute chips now produce nearly all of Nvidia’s revenue. The company sold $22.6 billion value of data center GPUs inside the second quarter of fiscal 2025 (which ended on July 28). The segment’s revenue shot up 162% 12 months over 12 months, accounting for 75% of the company’s top line. Nonetheless, there’s one other area of interest throughout the information center business where Nvidia is now gaining impressive traction.
This particular business segment is now larger than Nvidia’s gaming business, and it could change right into a key growth driver for the company in the long run. Here’s a greater take a take a look at this emerging business that will supercharge Nvidia’s growth.
Nvidia is making terrific progress on this $80 billion market
Nvidia sells two forms of information center chips. The first are the GPUs, which might be already generating several billion dollars in revenue for the company each quarter. The second number of Nvidia’s data center chips is its networking chips, which might be also selling like hotcakes as the company’s latest quarterly results show.
Nvidia sold $3.7 billion value of networking chips inside the previous quarter, up 114% from the similar quarter last 12 months. The company’s networking revenue in the first half of the fiscal 12 months stood at $6.8 billion, translating into an annual revenue run rate of nearly $14 billion. The worldwide data center networking market is estimated to generate $37.6 billion in revenue this 12 months. If Nvidia indeed ends fiscal 2025 with $14 billion in data center networking revenue, it would end up controlling 37% of this market.
What’s value noting here is that Nvidia is reportedly growing at a faster pace than the knowledge center networking space, which has received a serious shot inside the arm resulting from the arrival of AI. Consistent with market research firm Dell’Oro Group, the size of the knowledge center switching market is susceptible to expand by 50% resulting from the growing need for switches deployed in back-end AI server networks.
The researcher sees spending on switches utilized in back-end AI servers hitting $80 billion over the following five years, which may be nearly double the size of the current data center switch market. We now have already seen that Nvidia is having fun with a solid share of this market, and Dell’Oro points out the similar. The research firm says that the InfiniBand networking platform is currently dominating the marketplace for AI back-end networks, and it’s value noting that Nvidia offers networking products based on this networking communications standard.
Nvidia sells InfiniBand adapters, switches, data processing units (DPUs), routers, gateways, cables, and transceivers to customers. Dell’Oro, nevertheless, points out that the Ethernet-based networking standard could eventually overtake the InfiniBand standard in the following few years. The good news for Nvidia investors is that Nvidia has already set its sights on the Ethernet AI networking platform.
It claims that its Spectrum-X networking platform is the world’s first Ethernet networking platform for AI and is in a position to accelerating AI networking performance by 1.6x compared to traditional Ethernet. Nvidia management’s comments on the August earnings conference call suggest that Spectrum-X has gained terrific traction amongst customers. Consistent with CFO Colette Kress: “Ethernet for AI revenue, which contains our Spectrum-X end-to-end Ethernet platform, doubled sequentially with an entire bunch of consumers 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 crucial GPU compute cluster on the planet.”
A recent multibillion-dollar business inside the making
Kress says that Spectrum-X is “well on the suitable track to start out a multibillion-dollar product line inside a 12 months.” So, it won’t be surprising to see Nvidia eventually cornering a big portion of the knowledge center networking market. The speed of growth of Nvidia’s networking business means it’s growing at a faster pace than the knowledge center networking market at once, which is why it won’t be surprising to see it capture an excellent larger share of this space in the long term.
But even when the company holds on to its current market share of nearly 40% after five years, its annual networking revenue could hit $32 billion (based on the $80 billion market size projected earlier). That is perhaps a nice jump from the current annual revenue run rate of $14 billion inside the networking business.
Throw inside the rosy prospects of the overall AI chip market, which is anticipated to clock $311 billion in annual revenue in 2029, and it won’t be surprising to see Nvidia’s data center business becoming even larger in the long run than it’s at once. Not surprisingly, analysts expect Nvidia’s earnings to increase at an annual rate of over 52% for the following five years.
That’s the reason investors attempting to add an AI stock to their portfolios should consider buying Nvidia immediately since it is currently trading at 42 times forward earnings, a discount to the U.S. technology 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 Idiot has positions in and recommends Nvidia. The Motley Idiot 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 Idiot