Much of the revenue that microprocessor giant Intel (NASDAQ: INTC) enjoys from its data center group (DCG) comes from the sale of central processing units (CPUs). However, at its investor meeting back in late 2015, Intel DCG chief Diane Bryant said that the of the 15% compounded annual revenue growth (CAGR) that the company expected to see from DCG between 2015 and 2019, 3% of that growth rate would come from non-CPU products.
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Intel DCG chief Diane Bryant holding a silicon photonics module, one of the products that Intel is banking on for growth outside of CPUs. Image source: Intel.
Put another way, since Intel expected its CPU business within DCG to grow at a 12% CAGR through 2019, the growth rate of its non-CPU business would have to be substantially higher to bring the business unit CAGR to 15% (since the non-CPU part of the business was, in 2015, dramatically smaller than its CPU business).
Let's look at how the non-CPU business within Intel's DCG trended throughout 2016 and what drivers are expected to continue to fuel its growth in the years ahead.
Outpacing CPUs in 2016
Over the last three quarters, the non-CPU business within DCG saw revenue growth of 17.8% over the first three quarters of 2015, hitting $979 million (up from $831 million). The revenue growth that Intel saw from "platforms" (essentially CPUs and their related chipsets) in DCG over that time was just 6.89% -- less than half the growth rate of the non-CPU business.
The total year-to-date revenue growth rate in this business for Intel has been around 7.67%, so the non-CPU business contributed to just under one percentage point of the total growth rate.
Ramping up across 2016; implied 42.6% growth rate through 2019
The year-over-year growth in DCG's non-CPU revenues has accelerated throughout 2016. In the first quarter the growth rate was just 7.25%. It accelerated to 10.75% during the second quarter, and then skyrocketed to 33.57% during the third quarter of 2016.
The company's fourth-quarter results aren't in yet (they'll be available in late January), but I wouldn't be surprised if the growth rate in Intel's non-CPU DCG business stayed at elevated levels in the fourth quarter of 2016.
Intel's previous DCG growth rate expectation seems to suggest that investors will see a significant acceleration in that growth rate over the next couple of years.
To deconstruct the math, if Intel's DCG grew at a 15% compounded annual growth rate from 2015 through 2019 and Intel expected CPUs/platforms to grow at a 12% compounded annual growth rate through that period, this would imply roughly $4.53 billion in non-CPU DCG revenue by 2019 -- up from $1.095 billion in 2015.
That, for what it's worth, implies a 42.6% compounded annual growth rate for the non-CPU portion of Intel's DCG through 2019 -- significantly higher than what the company is likely to see in 2016.
Now, Intel isn't expecting to hit 15% growth in DCG this year, lowering its full-year guidance for DCG to "high-single digits" (i.e., 7% to 9%), but the point is clear: Intel is expecting some phenomenal growth from the non-CPU portions of DCG out in time.
Some notes of caution
The recent acceleration in the revenue growth rate in this sub-segment of DCG is encouraging, but investors should always keep in mind that having visibility into business trends even just a couple of quarters out, let alone several years out, is extremely tough.
That's why, even though Intel has had its 15% DCG compounded annual growth rate target out there for years, it has very rarely actually hit it.
Take Intel's long-term growth targets, both for DCG and those implied for each sub-segment of DCG (CPU and non-CPU), for what they are: goals that the company is aspiring to, not hard-and-fast guarantees.
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Ashraf Eassa owns shares of Intel. The Motley Fool recommends Intel. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.