xargs --replace/-I for single arguments

You can echo with newlines to achieve your expected result. In your case with the server expansion that would be:

$ echo -e server{1..4}"\n" | xargs -I{} echo derp {}
derp server1
derp server2
derp server3
derp server4

You can make use of an extra pipe like this,

echo a b c d | xargs -n1 | xargs -I{} echo derp {}
derp a
derp b
derp c
derp d

The intermediate use of xargs 'echos' each letter 'a b c d' individually because of the '-n1' option. This puts each letter on it's own line like this,

echo a b c d | xargs -n1
a
b
c
d 

It's important to understand when using -I (string replacement), xargs implies -L, which executes the utility command (in your case echo) once per line. Also, you cannot use -n with -L as they are mutually exclusive.