Over the last five years, Nvidia's (NASDAQ:NVDA) share price has climbed more than 1,000% and had a market cap of $522 billion at the time this was written. The stellar growth in the gaming and data center segments, along with the prospects for more growth from these two businesses, explains why investors have bid the stock to a high price-to-earnings ratio of 74. 

For the stock to justify that valuation and reach a $1 trillion market cap, Nvidia must deliver strong growth from its two largest segments. We'll look at why the gaming and data center businesses can continue growing, while also looking at potential risks standing in Nvidia's way.

An upward pointing arrow on fire.

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The boom in gaming hardware

At this time in 2016, Nvidia was just getting started in applying its core graphics-processing technology to the booming data center market. Since then, Nvidia's data center revenue has grown from 10% of its business to 36%, yet its core business of selling GPUs to gamers hasn't taken a back seat. The gaming segment generated $10.5 billion in revenue over the last four quarters, or 48% of the company's business, with gaming revenue up 85% year over year in the fiscal second quarter.

More people started gaming during the pandemic, which expanded the market for gaming hardware. The gaming GPU market should grow at a compound annual rate of 14% through 2026, according to Mordor Intelligence. If Nvidia's gaming segment grows at that rate, it could nearly double to almost $20 billion in annual revenue in five years.

Nvidia commands a dominant lead in gaming hardware, with an 83% market share of the discrete GPU market. It's also seeing growth with its GeForce Now cloud gaming service. Overall, growing interest in esports and the launch of more games taking advantage of the latest graphics technologies should encourage more upgrades for Nvidia's gaming GPUs for a long time.

These trends have already fueled a compound annual growth rate of 19.2% for the company's gaming business over the last three years. 

The data center segment should become Nvidia's largest business

The data center opportunity is even more promising and should grow to become Nvidia's largest segment by 2025. Its data center business generated $8.2 billion in revenue over the last four quarters, but management has estimated the addressable market at $100 billion. Nvidia has plenty of avenues to tackle this opportunity.

Its A100 chip has seen strong adoption for artificial intelligence use, including powering natural language processing and recommendation engines. Nvidia offers GPUs, data processing units (DPUs), and in the next few years its first data-center CPU, which could significantly expand its growth opportunity. 

Moreover, its acquisition of Mellanox a few years ago positions Nvidia to be a top supplier for networking hardware, which is sort of the nuts and bolts of the server market.

Beyond server hardware, Nvidia is now starting to launch software platforms that allow organizations to have all the tools they need to maintain top-level security for their servers, but at the same time provide sophisticated software for data scientists to use AI to design new applications. Nvidia sees software services built on its core GPU technology as another multibillion-dollar opportunity

What's more, if Nvidia gets through the regulatory approval process and lands Arm Holdings from SoftBank Group, that would just add many more billions of potential revenue to the company's already large addressable market. Arm would open other growth opportunities for Nvidia in Internet of Things and mobile devices. The long-term upside would be absolutely massive. 

Pitfalls to watch

It's very possible that Nvidia could double in value by 2025, but it's also impossible to know what the state of the economy will be at the time, and whether investors will have the appetite to pay a high P/E to buy the stock.

A recession or industrywide slowdown would slow Nvidia's revenue growth, potentially causing the stock to fall. Sometimes these slowdowns in the semiconductor industry can come unexpectedly, as it did in late 2018 when Nvidia's share price dropped 52% in the fourth quarter that year. 

In the near term, there is also possible downside risk for the stock if the Arm deal doesn't get approved. On the other hand, some analysts are placing a low probability of the deal happening, so there may not be any downside related to the pending Arm deal, but it's still something to keep in mind if you're buying the stock.

With that said, Nvidia's leadership in GPU technology puts it at the center of the burgeoning AI economy, with its expanding offering of hardware and software products. In my view, the odds are favorable that Nvidia can reach a market cap of $1 trillion by 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.