Prediction: This will be Nvidia’s next big move

By now you probably know this Nvidia (NVDA 4.35%) it’s the hottest tech stock. The company’s rapid rise from gaming chip maker to poster child of the artificial intelligence (AI) revolution and one of the world’s largest public companies has been nothing short of remarkable.

After its stock nearly tripled since the start of the year, it has retreated about 8% from its peak in June. Don’t be afraid. I think he still has a lot of room to run. If anything, this is a buying opportunity.

Nvidia is in a good position

Nvidia’s incredible revenue growth is largely driven by a few companies like Amazon and Microsoft that operate “hyperscale” (or “hyperscale”) data centers — really, really indeed large server farms. Companies are modernizing and scaling them to keep up with the massive and specialized computing resources required by AI. Nvidia superchips power them. Yes, there are other players, but Nvidia dominates the market.

The good news for Nvidia? This cash firehose doesn’t seem likely to be shut off anytime soon. During recent earnings calls, CEOs of the companies running these hyperscalers reiterated the need to continue — and even expand — AI-focused capital expenditures (capex). Alphabet spent an estimated $31 billion on investments in 2023. This year, that number could reach $50 billion — a colossal increase. And Alphabet is not alone.

Alphabet CEO Sundar Pichai summed up the tech giants’ attitude toward these investments this way: “The risk of underinvesting is dramatically greater than the risk of overinvesting for us here.” This message has been echoed by nearly every CEO running a hyperscaler. Nvidia is likely to enjoy substantial cash inflows in the near future. Of course, it will have to fend off competitors, but it is well positioned to do so.

Now, that’s usual. What’s Nvidia’s next big move?

Spotlight on Networks

Data centers are incredibly complex, especially those built for AI. At the heart of these systems are the chips that perform the calculations. This is the market that Nvidia dominates. However, all these high-powered computers create massive amounts of data, and that data needs to be transported. This is where network infrastructure comes in.

The standard for networking in most data centers has been ethernet, but the computational demands of AI are too great for the technology. Companies had to upgrade their data centers with a different networking technology, such as InfiniBand, to keep up. This is extremely expensive, but Nvidia has an answer. It recently launched its Spectrum-X platform, which enables data centers to remain ethernet-based and run advanced AI. This represents a large new revenue stream for the company.

Last quarter, Nvidia earned nearly $20 billion from its chips and $3 billion from its networking products. Mordor Intelligence estimates the total market for data center network infrastructure to be approximately $26 billion in 2024 and expects the space to grow at a compound annual growth rate (CAGR) of 18% through 2029. There is significant room to grow in this field.

But there is competition. Broadcom is already a major player. Nvidia is unlikely to dominate this space like it did with the chip market. However, this new ethernet-based approach could be a game-changer. A higher market share is very possible.