Graphics processing units (GPUs) are 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 implementation in personal computers (PCs) for gaming and content creation, before eventually striking gold with its datacenter GPUs that are now all the rage thanks to artificial intelligence (AI).
As it turns out, data center computer chips now generate the bulk of Nvidia’s revenue. The company sold $22.6 billion worth of data center GPUs in the second quarter of its fiscal 2025 (ended July 28). Revenue from the segment soared 162% year over year, accounting for 75% of the company’s top line. There’s another niche within the data center business, however, where Nvidia is now gaining impressive traction.
This particular business segment is now larger than Nvidia’s gaming business, and it could become a major growth driver for the company in the long term. Here’s a closer look at this emerging business that could accelerate Nvidia’s growth.
Nvidia is making huge strides in this $80 billion market
Nvidia sells two types of data center chips. The first are its GPUs, which already generate billions of dollars in revenue for the company each quarter. The second type of Nvidia 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 year-ago quarter, up 114% from the same quarter last year. The company’s networking revenue for the first half of the fiscal year was $6.8 billion, which translates to annual revenue of nearly $14 billion. The global data center networking market is expected to generate $37.6 billion in revenue this year. If Nvidia does end fiscal 2025 with $14 billion in data center networking revenue, it would ultimately control 37% of that market.
What’s worth noting here is that Nvidia is reportedly growing faster than the data center networking space, which has seen a significant boost from the advent of AI. According to market research firm Dell’Oro Group, the data center switching market size is likely to grow 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 is almost double the current data center switch market. We’ve already seen that Nvidia has a solid share of this market, and Dell’Oro points this out. The research firm says that its 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 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 its Ethernet AI networking platform.
It claims that its Spectrum-X networking platform is the world’s first Ethernet networking platform for AI, 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 seen tremendous traction among customers. According to CFO Colette Kress, “Ethernet for AI revenue, including 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-billion dollar company in the making
Kress says that Spectrum-X is “well on track to become a multibillion-dollar product line within a year.” So it shouldn’t be surprising to see Nvidia eventually capture a significant share of the data center networking market. The growth rate of Nvidia’s networking business means that it is growing faster than the data center networking market is currently, and so it shouldn’t be surprising to see it capture a larger share of that space in the future.
But even if the company maintains its current market share of nearly 40% in five years, its annual networking revenue could reach $32 billion (based on the previously predicted market value 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 outlook for the overall AI chip market, which is expected to generate $311 billion in annual revenue by 2029 , and it shouldn’t be surprising to see Nvidia’s data center business become even bigger in the long run than it is today. It’s no surprise, then, that 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 an AI stock to their portfolio would be wise to buy Nvidia right away. The company currently trades at 42 times forward earnings, which is lower than 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 and recommends Nvidia. The Motley Fool has a disclosure policy.
Prediction: This $80 Billion Market Could Be the Next Big Growth Engine for Nvidia Stock was originally published by The Motley Fool
