Nvidia Stock Is Still Cheap Based on Analysts' Targets - Short Put Plays Are Attractive

Nvidia (NVDA) stock still looks cheap according to analysts' price targets, which have been rising. Moreover, high yields from selling short out-of-the-money (OTM) put options are attractive. This article will describe that play.

NVDA is at $132.44 in midday trading on Tuesday, Oct. 8. It's risen almost 30% since Sept. 9 when it hit a recent low of $102.53.

But it could have still further to go. Analysts have been consistently raising their price targets. I discussed this in my recent Sept. 22 Barchart article, “Nvidia Stock Treads Water but Analysts Keep Raising Their Price Targets.”

Higher Price Target

I showed how NVDA could be worth $161 per share, or 21.5% higher, based on Nvidia's strong free cash flow (FCF) and FCF margins. This price target could be even higher as analysts have raised their revenue forecasts.

For example, analysts are now projecting $176.70 billion in revenue next year, up from $175.59 billion quoted in my last article. Therefore, using Nvidia's recent 45% FCF margin (see my last article), its free cash flow could be $79.515 billion.

Therefore, using a 2.0% FCF yield metric (equal to 50x FCF), the stock could be worth almost $4 trillion (i.e., $79.515b x 50 = $3,976 billion). That is 22.4% higher than its present $3,247 trillion market cap.

This means NVDA stock could be worth $162.11, +22.4%, sometime in the next 12 months. That could occur as it becomes clear that analysts' 2025 revenue targets and a 45% FCF margin are likely to occur.

Analysts Raising Their Targets

Sell-side analysts have been raising their target prices as well. For example, Yahoo! Finance says the average of 38 analysts is now $148.13, up from $145.22 in my last article (which was up from $142.75). Barchart's survey shows a higher mean price of $149.99, up from $148.82 earlier.

AnaChart's survey of 39 analysts who cover Nvidia stock now shows an average price target of $157.11, or +18.6% from today. This is also close to my price target. AnaChart only surveys analysts who've written recently or upgraded or downgraded their targets on the stock. That makes it particularly relevant.

This shows there is a good consensus that NVDA stock may still be undervalued over the next year. One way to play this is to sell short out-of-the-money (OTM) puts.

Shorting OTM Puts

For example, the Nov. 8 expiration period shows that the $123.00 strike price put options have a high bid-side premium of $3.60. That means a short seller of these puts can make an immediate yield of almost 3.0% ($3.60/$123.00 = 2.93%) for a strike price that is almost 7% below today's price.

NVDA puts expiring Nov. 8 - Barchart - As of Oct. 8

An investor who secures $12,300 in cash and/or margin with their brokerage firm can enter an order to “Sell to Open” 1 put contract. They will immediately receive $360 in their account.

That represents a one-month yield of 2.9268% on the $12.3K invested. If the investor can repeat this each month for a year, the annualized expected return (ER) is over 35%, regardless of whether NVDA rises.

Downside Risks and Past Trades

And even if the stock falls to $123.00, the investor has a lower breakeven of $123.00-$3.60, or $119.40, or 9.45% below today's price.

The table above shows that less risk-averse investors could sell short the $125.00 strike price put option and receive $4.25. That represents a one-month yield of 3.40%.

I discussed shorting OTM puts in my last article. So far these shorts have also worked out. For example, I suggested shorting the $110 put option expiring Oct. 18 for a premium of $3.00. That put is now trading for just 18 cents on the ask side. In other words, the investor has made good profits, having sold at $3.00 and buying back at $0.18, or $2.82. 

Moreover, the put yield was 2.72% at the time of the trade (i.e., $3.00/$110.00). Even if the investor exits this trade (i.e., enters an order to “Buy to Close”), they would still make 2.56% (i.e., $2.82/$110.00). The reason is that higher yields are now available in the Nov. 11 option chain, as shown above.

The bottom line here is the NVDA stock is very cheap. Existing investors who also short out-of-the-money puts can make extra income while they wait for the stock to reach higher price targets.

On the date of publication, Mark R. Hake, CFA had a position in: NVDA . All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.