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Nvidia Corp. (NVDA) could still be worth up to 26% more at $1,141 per share. This valuation is based on its massive FCF margins. Existing shareholders can gain extra income by shorting out-of-the-money (OTM) put options in nearby expiry periods. That will help wait for NVDA stock to reach this price target.
I discussed this in several recent Barchart articles, including this one on Feb. 25: “Nvidia Stock Could Be Worth 42% More at $1,120 - Put Short Sellers Find This Attractive.”
At the time, NVDA stock was at $786.90 and I discussed shorting the $750 and $740 put options expiring on March 15. The premiums ($16.30 and $14.30) provided 3-week yields of 2.173% and 1.932%, respectively.
Since NVDA closed at $878.37, these puts were not exercised and expired worthless. This gave short-sellers of these put options a good profit as their secured cash for the trade was not exercised to buy the stock. Moreover, existing shareholders who did this trade gained all the upside in NVDA.
Expected Upside Based on Nvidia's FCF
As of March 28, NVDA stock is even higher at $903.56. But its put option premiums are still elevated. This provides huge expected return (ER) and short-put yield opportunities, especially for long investors in the stock.
But first, let's review why Nvidia could still rise from here. My thesis for this, as seen in my last article and prior ones such as this one on Jan. 8 and my recent GuruFocus article, is based on Nvidia's free cash flow (FCF) and FCF margins.
For example, Nvidia's recent quarterly FCF rose to $11.2 billion, up from $7.04 billion in the prior quarter. That accounted for an astounding 50.8% of its $22.1 billion quarterly revenue.
If this keeps up over the next 12 months or longer, its FCF could grow dramatically. For example, analysts surveyed by Refinitiv, seen on Yahoo! Finance's analysis page, have an average revenue forecast of $102.29 billion for the year ending Jan 2025. For the following year, the average forecast is $126.04 billion.
So, sometime in the next 12 months (NTM), the company will be on a revenue run rate of $114.165 billion. Therefore, if we apply a 50% FCF margin against this, Nvidia could generate over $57 billion in FCF (i.e., $14.165b x 0.50 = $57.0825 billion FCF) sometime in the next 12 months (NTM).
That represents a gain of 111% over the $26.947 billion in FCF it made in the last 12 months ending Jan. 28, 2024. We can use this forecast to set a price target for NVDA stock.
Price Target for NVDA Stock
For example, if Nvidia paid out 100% of this FCF in dividends, the stock would have at least a 2.0% dividend yield. For example, right now the stock has a much lower yield of 0.02%, but it pays out just $396 million in dividends or just 1.5% of its $26.95 billion in FCF.
So, here is how that math works out. First, paying 100% of FCF as dividends would be 66.667 times higher than the 1.50% it presently pays out. Therefore, we multiply its existing dividend yield of 0.02% by 66.667x. That works out to a revised dividend yield of 1.3333% (i.e. 66.667 x 0.0002 = 0.01333).
However, to be conservative, I use a higher 2.0% yield assumption. So, dividing the NTM FCF estimate of $57.08 billion by 2% results in a market cap of $2,854 billion (i.e., $2.85 trillion). Today Nvidia's market cap is just $2.259 trillion, according to Yahoo! Finance. In other words, NVDA stock is worth 26.3% more than its market cap today, using a 2.0% FCF yield metric.
That implies that NVDA stock is worth 1.263 x $903.56, or $1,142.20 per share.
This is higher than the average analyst price target. For example, AnaChart.com, a new sell-side analyst tracking service, shows that the average of 38 analysts' price targets is $998.56. This is over 10% higher than today's price. However, looking at AnaChart's tracking of these analysts' recommendations on AnaChart shows that these analysts have consistently been raising their price targets.
That can be seen in the AnaChart chart above of analysts' recommendations vs. the stock price in the last several months. As the stock has risen, so have these stock price targets.
My analysis gives you a way of making sense of these price targets. Using analysts' revenue forecasts and applying them against Nvidia's expected FCF margins, and a FCF yield valuation metric, we set a price target.
One way for existing investors in NVDA stock to take advantage of this is to short OTM puts.
Shorting OTM Puts for Extra Income
For example, look at the April 19 expiration put option expiration period, which is three weeks away. That shows that the $880 strike price puts, which are 2.6% below today's price, are trading for $25.50 on the bid side. This particular strike price is very popular, as there are now over 1,600 put contracts outstanding.
This means that the short put investor can make a yield of over 2.887% (i.e., $25.50/$880.00) with just 21 days until expiration.
For example, existing shareholders who own the stock can use some of their margin (along with cash in the account) to secure $88,000 per contract shorted. After entering an order to “Sell to Open” the investor's brokerage account immediately receives $2,550 per put contract shorted. Therefore, the $2,550 represents 2.887% of the $88K invested in this trade.
The downside is this: if NVDA tanks between now and April 19, the investor's cash and/or margin will be automatically debited to buy 100 shares at $880 per share. That could result in an unrealized loss for the investor, especially if NVDA falls substantially below the breakeven price of $854.50 (i.e., $880-$25.50), or 5.43% below today's price (i.e., $854.50/$903.56-1).
On the other hand, this represents a very good expected return (ER), especially if the trade can be consistently repeated. For example, over the next 90 days, if this short-put yield play can be repeated every 3 weeks, the ER is $2,500 x 4, or $10,200. That represents an expected ROI of 11.59% quarterly (i.e., $10,200/$88,000), or 46.36% annualized.
The bottom line is that Nvidia's upside based on its FCF provides long-term investors in NVDA stock good potential returns, especially if they short OTM puts in nearby expiry periods.
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.
