Nvidia (NVDA 2.57%) stock has gained some ground on the stock market of late, gaining more than 15% in the past three months and outpacing the S&P 500's gains of just 5%, in what may seem like a surprising rally given the terrible situation the company's gaming business is in right now.

But it seems like savvy investors are looking past the weakness in the gaming business as there is one potentially huge catalyst that could help Nvidia tide over the troubles it is witnessing in its second-largest segment -- the company's Arm-based Grace server central processing units (CPUs). Let's see why this new chip platform could be a big deal for Nvidia when it hits the market in 2023.

Arm-based processors are gaining ground in servers

The server processor market is currently dominated by processors based on the x86 architecture from Advanced Micro Devices and Intel. Market research company Omdia estimates that Arm-based server processors reportedly commanded just 7.1% of the market in the second quarter of 2022, with the rest dominated by x86 processors.

However, it is worth noting that the adoption of Arm server CPUs has been growing consistently. Omdia estimates that Arm server processors accounted for less than 1% of the overall market in 2019. The share increased to 2.2% in 2020 and 5.4% in 2021. The demand for Arm-based server processors is expected to take off in the long run thanks to their ability to deliver higher computing power while consuming less energy.

Moreover, Arm-based chips can be customized to perform specific workloads such as artificial intelligence (AI) and machine learning. Not surprisingly, many cloud service providers are turning to Arm-based servers for their data centers, including the likes of Alphabet, Amazon, and Oracle.

As a result, the share of Arm processors in data center servers is expected to jump to 22% by 2025, according to market research company TrendForce. According to another estimate from Omdia, Arm chips could be powering half of the cloud servers by 2026. All this explains why the Arm-based server processor market is expected to triple over the next decade, generating close to $17 billion in annual revenue by 2032 as compared to this year's estimate of $5.2 billion.

So, Nvidia is making its entry into the Arm server processor market at the right time, and it won't be surprising to see the Grace chips give its top line a shot in the arm in 2023.

Nvidia's server processors could start moving the needle

Nvidia's upcoming Grace server chips are expected to be based on Taiwan Semiconductor Manufacturing's latest 5 nanometer (nm) manufacturing process. TSMC's 5 nm manufacturing node is said to be 80% denser than the preceding 7 nm process. In simpler words, the chips made using this platform pack more transistors into a smaller area, so they can carry out more calculations while consuming less power.

Nvidia is already claiming that its Grace processors are significantly faster and more efficient as compared to Intel's Ice Lake server processors. It remains to be seen how Nvidia's chips stack up against rivals when they hit the market, but it is impressive to see that the chipmaker has already landed some big names that are expected to use the Grace chips.

In a press release in May 2022, Nvidia pointed out that "dozens of server models from ASUS, Foxconn Industrial Internet, GIGABYTE, QCT, Supermicro and Wiwynn are expected starting in the first half of 2023." Nvidia is already a dominant force in data center graphics cards, and the company could quickly corner a nice share of the Arm-based server processor market as well given its existing relationships with cloud service providers.

If Nvidia manages to capture even 10% of the Arm server processor market by the end of 2023, it could see an additional $500 million in revenue based on the market's estimated size as discussed above. Of course, a bigger share means that Nvidia could generate more revenue out of this space, and the company could very well corner a larger chunk of this space given that it is going to launch a wide range of Arm-based server systems to tackle different kinds of workloads ranging from artificial-intelligence training and inference, to high-performance computing, to digital twins, to cloud gaming.

As such, the introduction of server processors by Nvidia could give its fast-growing data center business a big boost and mitigate the weakness in the gaming market. The company has generated $11.4 billion in data center revenue in the first nine months of fiscal 2023, up 55% over the prior-year period. The addition of a new catalyst should help the company sustain its terrific data center growth, which may be one of the reasons why analysts are expecting an uptick in the company's financial performance in fiscal 2024 (which will begin in February 2023).

The tech giant is expected to post a 9% increase in revenue and a 32% jump in earnings per share next fiscal year following a woeful performance in the current one, and the shot in the arm from the server market could play a key role in helping Nvidia live up to Wall Street's expectations.