What a $30 Billion Data Center Business Would Mean for Intel Corporation

I cannot be more positive on Intel's (INTC 1.77%) data center business. As I have written about previously, this is an exceptionally well-run business with a very wide-and-deep competitive moat. And, positively for Intel, the company is exposed to many strong secular growth drivers and is poised to gain share in some very large markets (such as the $18 billion networking chip business).

In a recent interview with Mad Money's Jim Cramer, Intel CEO Brian Krzanich indicated that by the end of the decade, the company's data center business could grow from around $16 billion in 2015 to roughly $30 billion. To achieve this, this business would need to grow at a 14% compounded annual rate through 2020.

Although I don't take this as formal financial guidance from Intel (it's highly unlikely that any company could have this level of visibility), it's worth pondering what this business growing to $30 billion could mean for Intel's stock price.

Solid upside to be had in this case
One of the nice things about Intel's Data Center Group ("DCG") is that it has extremely robust operating margins (approximately 50%) and I believe that there's a really good chance that these kinds of margins are sustainable over the long-term given how competitive the company's products tend to be here.

If we assume that the PC business stays flat to current levels at around $30 billion (as Krzanich indicated in the interview with Cramer), DCG balloons to $30 billion, and make some reasonable assumptions around the other businesses, here are the numbers I get:

Source: Author estimates.

In this case, by 2020, Intel is raking in around $70 billion in revenue and approximately $24.72 billion in operating income. These numbers exclude Altera as I'd like to wait and see how this business performs over the next few quarters before trying to estimate future revenue (though it should be north of $2 billion by 2020).

Assuming a tax rate of 27%, this works out to net income of $18 billion. Applying a multiple of 13 times earnings gives a market capitalization of $234 billion -- good for a stock price of just shy of $50/share.

Fair warning: it will take time and there are plenty of risks to these estimates
If Intel can actually achieve the numbers above, then the share price could be poised to rise substantially over the next five years or so. However, it's important to keep in mind that this far from a "slam dunk."

For example, Intel's data center group could grow at a slower pace than anticipated, leading to less than $30 billion in revenue. Competitive threats could also prove more robust than I expect, which could potentially impact both revenue and operating margin.

Further, even if the data center group actually delivers, there's still risk around the Client Computing Group. The revenue assumption above presupposes that the company's PC business stays about flat; given the declines over the last several years, it's hard to have confidence that a bottom in this business is in sight.

The good news, though, is that the losses associated with the company's mobile efforts could actually be gone by 2020 at the pace Intel is going at, which could bolster operating margin here even if revenue stability/growth proves to be challenging.