The most exciting of Intel's (INTC -0.53%) business units is its Data Center Group. Although it doesn't bring in as much revenue and operating profit as its PC Client Group does, it is a large and growing part of the company's business that is exposed to many positive long-term secular trends.
In 2014, Intel's data center group generated $14.39 billion in revenue and just shy of $7.3 billion in operating income. What's really exciting, though, is that Intel has said that it aims to grow revenue in this business at a 15% compounded annual growth rate through 2018.
I believe that if Intel is able to achieve the kind of revenue growth that it is aiming for, and if it can grow operating profit at a similar -- if not faster -- pace, then the data center group alone could propel Intel shares higher over the next several years.
Let's assume Intel achieves its goal
Suppose that Intel succeeds in hitting its revenue growth target through 2018. This would imply that by the end of the company's forecast period, the company's data center group will be at a roughly $25 billion revenue run rate.
Now, if we assume that operating margins here remain at around 50% (operating margins in this operating segment were 50.6% in 2014), then this would suggest operating income from the company's data center group of around $12.5 billion.
What would this mean for Intel's share price?
It is hard to make a prediction of Intel's total revenue/profit picture based on the above analysis, but for the sake of conservatism let's suppose that the rest of Intel's business sees revenue and operating income decline by 10% in 2018 relative to 2014 levels.
Going with that assumption would imply that Intel as a whole would bring in $62.3 billion in revenue and around $20.6 billion in operating income. If we factor in a 28% tax rate on the company's operating income, then this would mean $14.83 billion in net income.
Intel currently trades for just under 13 times expected fiscal year 2016 earnings, so if we were to go ahead and apply this multiple to the above net income figure, then this would imply a market capitalization of $192 billion or approximately $40 per share at the current share count.
Is a 35% gain in three years really worth investing in?
The above analysis seems to suggest that if somebody were to buy Intel stock today, she or he could essentially look forward to a 35% return in around 3 years, or around 11.5% per year. On the surface, this seems decent, but not exactly the most exciting investment in the world.
However, the reason that I find this analysis compelling is because the underlying assumptions seem pretty modest, meaning that the $40 target price might not be particularly aggressive. Remember that I assumed that the aggregate of Intel's non-PC business would decline by 10% relative to 2014 levels by 2018 -- an assumption that seems quite conservative.
Although the outlook for the PC market is uncertain, there's a good chance that Intel's Client Computing Group revenues (which consist of PC, tablet, and smartphone platform sales) could be flat to even up. In that case, there could be upside to the above revenue, earnings-per-share, and ultimately the stock price.
Additionally, Intel's Internet of Things and NAND flash businesses should also be positives for the company's non-data center revenue and could certainly serve to buffer the overall business against modest declines in the PC business.
There are a lot of unknowns here, though, and it may very well turn out that my assumptions aren't as conservative as I currently believe them to be.
With that being said, as an Intel stockholder I feel pretty comfortable with the above assumptions and ultimately think that patient investors with multi-year time-horizons have pretty reasonable odds of making some good money investing in Intel stock.