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Nvidia Corporation (NVDA) produced blowout results on Nov. 21, including impressive revenue, free cash flow (FCF), and related FCF margins for its Q3 period ending Oct. 29. They imply that NVDA stock could be worth over $700 per share in the next year.
That represents a potential upside of almost 50% from its price of $477.76 as of Nov. 24. This article will describe why that might be the case over the next year.
This is despite the stock's recent drop after the results came. I foreshadowed this in my Nov. 13 Barchart article, “Nvidia Put Option Premiums Are Sky High - Ideal to Sell Short for Income.”
The company beat revenue expectations of about $16 billion, producing $18.12 billion. Moreover, its FCF rose to $7.042 billion, up from $6.048 billion in the prior quarter.
However, investors immediately sold off the stock, almost without any merit.
This is probably due to a “sell on the news” reaction. Nevertheless, investors should focus on the company's results to see what they imply for NVDA stock. This is especially true in relation to the company's guidance as well as its free cash flow potential.
FCF Could Exceed Over $35 Billion Next Year
Nvidia generated $38.8 billion in sales for the nine months ending Oct. 29 as well as an FCF of $15.7 billion. That represents an FCF margin of over 40%.
Free cash flow is the total amount of cash generated by the company. This is after deducting all its cash expenses from revenue, including some items not on the income statement. This includes capital expenditures as well as working capital changes. The net result is that this cash flow is “free” to be either kept in the banking account or spent on shareholder-enhancing items like dividends, buybacks, debt reduction, or acquisitions. This is important since it shows how much of a cash cow the company's operations really are.
Most of Nvidia's record results came as a result of its data center Q3 revenue which was $14.5 billion, or 80% of its quarterly $18.1 billion revenue. That data center revenue represented 41% growth from even the $10.3 billion it generated in Q2.
In other words, its main revenue component is experiencing accelerating growth. That is why the company projected $20 billion in revenue for Q4, up from $18.1 billion in Q3.
Moreover, analysts are now forecasting full-year revenue of $58.57 billion for the year ending Jan. 31, up from $54.08 billion prior to these results. More importantly, next year they project revenue will rise to $88.25 billion, up from $79.39 billion in previous forecasts.
As a result, we can now expect that free cash flow will surge next year. For example, using a 40% FCF margin, FCF could hit $35 billion. This is seen by multiplying $88.25b by 0.40 (i.e., $35.3b).
That has huge implications for what NVDA stock will be worth over the next year.
NVDA Stock Could Be Worth Over $700 Per Share
Here is how that might work out. Analysts like to use a metric called FCF yield to value a stock. That implies that if it wanted to Nvidia could pay out 100% of its FCF as a dividend.
So, for example, using a 2% dividend yield (or in this case an FCF yield), the $35.3 billion in forecast FCF implies that Nvidia's stock market value would be $1,765 billion. That can be seen by dividing $35.3 billion by 0.02. (i.e., $35b/0.02=$1,765b).
Right now NVDA stock has a market capitalization of just $1.18 trillion (i.e., $1,180 billion). So, this implies that Nvidia's market cap could rise by 49.6% (i.e., $1.75tr/$1.18tr=1.4957).
As a result, this means that NVDA stock could be worth 49.5% over its present price of $477.76 per share on Nov. 24. That sets the target price at $714.73 per share.
In other words, using a 40% FCF margin against analysts' revenue projections for next year and with a 2% FCF yield, the stock could be worth almost 50% more.
The bottom line is that investors should not worry too much about short-term moves in NVDA stock. It looks to be worth significantly more over the next year if revenue and FCF keep powering ahead.
On the date of publication, Mark R. Hake, CFA did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
