Why Intels Data Center Group Could Have a Banner Year in 2017

Intel management has publicly stated that the company aims to grow its highly lucrative data center business at a 15% compounded annual growth rate through 2018. Although the company missed this mark in 2012 and 2013, growing revenue by 6% and 7% respectively, it grew this business by 18% in 2014 and claims it's on track to hit this goal in 2015.

Although it's not yet clear to me how the company's data center group will perform in 2016, I believe that 2017 has the potential to be a banner year for this segment. Here's why.

Centering on PurleyIn 2017, Intel is expected to launch its next-generation server platform known as Purley. Purley will support Intel's next-generation Skylake-EP/EX processors, which promise to bring significant performance and power efficiency enhancements over previous generation processors.

However, it's not just about faster processors. According to a leaked Intel slide, Purley is expected to deliver the "biggest platform advancement since Nehalem." These include support for Intel's recently announced 3D XPoint memory modules, integrated network, and interconnect fabrics, as well as more robust connectivity in the platform controller hub.

The three pillars of Purley-driven revenue growthI see three major ways that Purley could lead to significant revenue growth for Intel: (1) average selling price growth, (2) share gains in major segments, and (3) platform content share gains.

Let's take a closer look at each of these.

The average selling price storyA big part of the 18% revenue growth that Intel's data center group delivered last year was actually due to healthy average selling price growth. Indeed, during 2014, Intel reported that its data center group saw an 8% increase in platform unit volumes and a cool 10% increase in platform average selling prices.

What's interesting, though, is that this isn't a case of Intel jacking up prices on its customers because it's the only game in town; instead, what's happening -- according to Intel -- is that customers are choosing to buy higher-performance processors as these offer better total cost of ownership (see here for an in-depth look at why this is).

With the Skylake-EP processors on the Purley platform, I suspect that this trend will be amplified for a number of reasons. Firstly, Intel is expected to offer Skylake-EP chips with integrated Omni-Path fabric, which should allow Intel to charge a premium over parts without the integrated fabric.

Next, Intel is expected to offer versions of Skylake-EP (at least according to some leaked slides) with on-package FPGAs. It's unclear how popular such parts will be, but these, too, should command premiums over parts that don't have these FPGAs on-package.

Finally, Skylake-EP/EX processors are expected to be available in configurations with up to 28 cores, which is up from the 22 and 24 cores that Broadwell-EP and Broadwell-EX are expected to come in, respectively. I suspect that Intel will be able to command even higher prices for 28-core models than it will for 24-core Broadwell chips, helping to further fuel the average selling price story.

Share gains in new marketsIn the traditional server market, Intel has -- by its own estimates -- over 95% market segment share, so there's not a ton of room to gain share here.

However, there are areas where Intel still has the opportunity to gain some share. For example, Intel says that it has under 10% market segment share of the $18 billion networking chip market (to read more about Intel's strategy to gain share, click here), but that it is actively investing to gain share.

With Purley (as well as a potential follow-on to the recently released Xeon D processors), I suspect that Intel will further bolster the value proposition that it brings to this market, helping it to gain share.

Another area where Purley should shine, thanks to some key design improvements, is in high-performance computing. This is a market where Intel has very high market share, but I suspect that with the improvements coming in Purley (AVX-512 support should be huge for this market) Intel will be able to further extend its share.

Grabbing more silicon contentIntel executives have talked at length about how growing the company's silicon footprint in the data center is key to its data center strategy. I believe with technologies that Intel has in store for launch around when Purley launches, the company should see an acceleration in its quest to grab more silicon content.

For example, Intel has said that it plans to offer its new 3D XPoint technology as memory modules. These modules will require the Purley platform in order to function properly. This means that, in addition to providing an incentive for customers that want to deploy 3D XPoint technology to upgrade to Intel's latest platform, Intel should be able to capture the additional revenue dollars that come from the sale of 3D XPoint devices.

Other areas where Intel should be able to gain share include sales of components related to its Omni-Path interconnect (this launches later this year, but adoption may accelerate with the launch of Purley), sale of silicon photonic-related components, as well as NAND flash and 3D XPoint-based storage drives.

2017 could be a great year for Intel's data center groupI believe that, as a result of the drivers mentioned above, in addition to the major secular trends that Intel's data center group is exposed to, Intel's data center group should -- barring a major economic recession or some other "black swan" event -- have a fantastic 2017.

The article Why Intels Data Center Group Could Have a Banner Year in 2017 originally appeared on Fool.com.

Ashraf Eassa owns shares of Intel. The Motley Fool owns and 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.

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