What happened 

Shares of NVIDIA (NASDAQ:NVDA) rose 4.8% on Thursday, following an intriguing new analyst report. 

So what 

After speaking with NVIDIA's chief financial officer, Colette Kress, Jefferies analyst Mark Lipacis repeated his buy rating on the chipmaker's stock and boosted his price forecast from $740 to a Wall Street high of $854.

Lipacis believes investors are underestimating NVIDIA's opportunity to license its new data center software. Yet that could change, Lipacis posits, once the company begins to report its software sales as a separate line item on its income statement.

A rising bar chart.

Investors are excited about NVIDIA's long-term growth prospects. Image source: Getty Images.

Additionally, Lipacis expects NVIDIA's pending $40 billion acquisition of U.K.-based mobile chip specialist Arm Limited to close in early 2022. He also noted the potential for NVIDIA to bring Arm's technology to new markets, including data centers, automobiles, and the Internet of Things.

Now what

Lipacis is right to highlight NVIDIA's software ambitions. Software can be significantly more profitable than computer hardware. And should this emerging business help to improve NVIDIA's overall profit margins, investors will likely be willing to pay a higher price for its earnings.

For his part, Lipacis' new price target is based on a price-to-earnings ratio of 25 on his $50 EPS estimate for the company in 2025. 

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.