Yea I think that an X7 M would be a bit too much. You can already put a hefty engine in the X7, so really what you'd be missing without an M package is a body kit, racing seats (which would be bizarre in the X7) and some other add-ons like carbon fiber and a different steering wheel.
Would it be cool? Yes. But I don't think it is cool enough for BMW to put the money into it. And I also do think that it would kinda be a weird thing to incorporate into the M brand.