NVIDIA's Data Center Business Is Set for Growth in China

One of the hottest growth markets for NVIDIA (NASDAQ: NVDA) right now is data centers. The same graphics processing unit (GPU) technology used to power video games is now being used by cloud service providers to process the mountains of data consumers create, including videos, photos, and messages that ultimately get stored on a cloud server. NVIDIA's data center segment has shown no signs of slowing down, with segment growth of 175% year over year in the most recent quarter.

Archrival Advanced Micro Devices (NASDAQ: AMD) recently decided to get in on the action by announcing a collaboration with Baidu (NASDAQ: BIDU), a major cloud service provider in China and one of NVIDIA's key customers. Contrary to what you might think, this doesn't hurt NVIDIA. In fact, NVIDIA is still very much a preferred chip provider to Baidu, as well as other Chinese tech giants, which should encourage NVIDIA investors, considering the huge opportunity China represents.

The Chinese data center market is booming

China's data center market is expected to grow 13% per year through 2020, according to Technavio. There are a few key developments taking shape that are fueling this growth.

The main driver of growth is stemming from China's large population, which makes up about 25% of the world's online population, and it's about to increase even more. Less than half of China's 1.3 billion people are online, and China's government has set a goal to get every one of its citizens online within the next five years.

The Chinese market has been underserved by data center providers. This has caused data center demand to exceed the available supply. China has to catch up quickly with another 600 million Chinese consumers about to go online, who will inevitably generate more data that will need to be stored on servers.

Also, China recently made it a law to require foreign companies to store local customer data in China, which will create further demand for data center capacity. This is likely the reason Apple is planning to build its first data center in China, according to The New York Times. Two of NVIDIA's customers -- Amazon.com's Amazon Web Services and Microsoft's Azure cloud service -- have had a data center presence in China for the last few years.

Where does this leave NVIDIA?

NVIDIA has seen its data center revenue grow more than 100% year over year for several quarters. Some can argue that this was easy pickings since NVIDIA has had no real competition in the data center market. It seemed the one likely challenger, AMD, was more focused on winning back market share in the central processing unit (CPU) market from Intel than competing head-to-head with NVIDIA for data center business.

Recently, however, AMD ramped up its effort with the announcement that Baidu will use AMD's Radeon Instinct GPUs in Baidu data centers. This is an important win that gives AMD much-needed credibility as a serious GPU provider for artificial intelligence and data center applications.

However, a few months before AMD's announcement, NVIDIA also announced a partnership with Baidu -- one that is much broader in scope than the one with AMD. In early July, Baidu announced it would use NVIDIA's new Volta GPUs in Baidu Cloud. In addition, Baidu is adopting NVIDIA's DRIVE PX technology for its self-driving car program, in which Baidu is collaborating with major Chinese carmakers. Baidu will also use Volta GPUs for its PaddlePaddle open source deep learning initiative, and work with NVIDIA to bring Baidu's AI conversation system to NVIDIA SHIELD TV for Chinese consumers.

Furthermore, Alibaba Group Holding, Tencent Holdings, and Baidu -- three of the biggest data center providers in China -- are upgrading their data centers to NVIDIA's new Volta GPUs, which offer a five-times performance improvement over the previous Pascal GPUs. Overall, the new Volta-based V100 GPU provides the equivalent performance of 100 CPUs for deep learning.

NVIDIA's well-positioned for growth in China

AMD is certainly getting itself back on track with its recent announcements, but it's clear when looking at both companies' collaborations NVIDIA is still very much a preferred partner of China's biggest tech companies.

NVIDIA estimates its data center addressable market at $30 billion by 2020. Given that data center revenue makes up only 16% of its $8.3 billion in trailing-12-month total revenue, NVIDIA's data center segment still has plenty of upside over the long term.

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Teresa Kersten is an employee of LinkedIn and is a member of The Motley Fool’s board of directors. LinkedIn is owned by Microsoft. John Ballard owns shares of Nvidia. The Motley Fool owns shares of and recommends Amazon, Apple, Baidu, and Nvidia. The Motley Fool has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool has a disclosure policy.