NVIDIA (NASDAQ:NVDA) continued to experience strong momentum in the gaming segment last quarter. The RTX upgrade cycle is in full swing, but most of NVIDIA's users of its GeForce family of graphics processing units (GPUs) haven't upgraded yet. Despite competition from rival Advanced Micro Devices (NASDAQ:AMD), NVIDIA expects a strong second half of the year for its gaming business. 

Growing demand for RTX

NVIDIA's gaming segment comprised 43% of its total revenue in the fiscal second quarter. While NVIDIA is experiencing explosive growth in its data center business, which became its largest source of revenue for the first time, growth in gaming was robust, up 26% year over year.

"Gaming's growth amid the pandemic highlights the emergence of a leading form of entertainment worldwide," CFO Colette Kress said during the company's conference call. 

A girl playing a video game on a PC.

Image source: Getty Images.

While the pandemic disrupted sales of NVIDIA's gaming products at the beginning of the pandemic, demand quickly shifted online. Momentum picked up when iCafes in China reopened and as more people started buying laptops to work and play games at home. 

Demand was also sparked by NVIDIA partnering with manufacturers to deploy over 100 new notebook models powered with GeForce graphics cards at various price points. The RTX series is popular for its ray-tracing graphics technology, which will be in a laptop form factor for the first time.

Strong sales expected this holiday

The fourth quarter is always a busy season for the video game industry. Developers like to release games in the fourth quarter to drive higher holiday sales, but with new gaming consoles launching this fall, the fourth quarter is going to be even bigger, which could be great for NVIDIA.

The highly anticipated Cyberpunk 2077, along with the new Watch Dogs, will support ray tracing and could spur further upgrades to RTX cards by GeForce users. 

Moreover, the new game consoles from Sony and Microsoft will also support ray tracing. Support for this technology has been growing on PC, but it will take off when the PlayStation 5 and Xbox Series X launch this holiday season. While AMD is providing the graphics chips for the new consoles, NVIDIA will still benefit.

Many of the top games on console also release with a PC version. As game developers start including ray tracing for console titles, NVIDIA should see even greater demand for RTX cards, with more new PC games featuring the technology. 

It's for these reasons that NVIDIA CEO Jensen Huang stated, "I think this may very well be one of the best gaming seasons ever." 

More upside in gaming

NVIDIA's gaming business is performing well now, but keep in mind that less than one-third of the GeForce installed base of users have upgraded to RTX. Ray tracing is going to go mainstream this fall, and this could keep NVIDIA's gaming business growing at healthy rates well into next year.

It's understandable that this growth stock is hitting new highs. The data center business is booming, but NVIDIA's core gaming business continues to deliver, and there are growth catalysts on the horizon to maintain healthy demand.

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