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Nvidia Inc. (NVDA) produced massive free cash flow (FCF) margins in its latest quarter ending April 28, 2024 - over 57.3% of quarterly sales, up from 50.7% last quarter. At this pace, NVDA stock could be worth 45% more at close to $150 per share, post-split over the next year.
Here is what happened in terms of free cash flow. Nvidia generated almost $15 billion ($14.936 b) in FCF in its fiscal Q1 2025. That represents 57.35% of the quarter's $26.044 billion in revenue. This is one of the highest FCF margins in the tech world.
Moreover, this far exceeds the FCF margin it made last quarter: $11.217 billion on $22.103 billion in revenue, or a 50.75% FCF margin. This means that the company has massive operating leverage. That means that as revenue rises, its profitability and FCF margins can be expected to increase exponentially.
That has huge implications for the value of NVDA stock going forward, even if the rate of revenue growth slows. Here is how that might work out.
Valuing NVDA Stock
One way to value NVDA stock is to assume that its trailing 12-month FCF margins will increase. Then apply that FCF margin estimate to forecasts of revenue over the next 12 months. Finally, use an FCF yield metric to value this FCF estimate.
For example, over the last year including FY Q1 2025, Nvidia has generated over $39.3 billion of FCF on $79.77 billion in revenue. That works out to a trailing 12-month (TTM) FCF margin of 49.3%.
Given that its latest quarterly FCF margin was much higher at 57.35%, let's estimate that over the next 12 months (NTM) Nvidia will make at least 53.5% FCF margins.
So, for example, analysts estimate that revenue for this fiscal year ending Jan. 2025 will reach $120.56 billion and $154.82 billion next year. That implies that the NTM revenue forecast is $137.69 billion on average.
Applying a 53.5% margin results in an NTM FCF forecast of $73.66 billion. That is 23% higher than a rolling run rate estimate from Q1 2025 (i.e., $14.936 billion x 4, or $58.74 billion).
As a result, the market is likely to keep valuing NVDA stock at least 23% higher.
Price Target for NVDA
One way to value this huge FCF estimate is to use an FCF yield estimate. For example, Nvidia has generated $39.3 billion in FCF in the last year and it now has a $2,574 billion market cap. That means that its FCF yield valuation today is 1.53% (i.e., $39.3b/$2,574b). That is also the same as multiplying FCF by 65.5x (i.e., the inverse of 1.53%).
Just to be conservative, let's use a 2.0% FCF yield metric (i.e., a 50x multiple). Therefore, multiplying the $73.66 billion NTM FCF estimate (see above) by 50x results in a market cap estimate of $3,683 billion (i.e., $3.688 trillion). That is 43% higher than today's market cap of $2.574 trillion.
In other words, sometime in the next year, the market is likely to value NVDA stock 43% higher, once it realizes that the company will generate at least 53.5% FCF margins over the next 12 months.
That implies that NVDA stock is worth 43% more than its price today of $1,045.62 (i.e., $104.56 post-split effective June 7), or $149.52 per share post-split.
Investors should consider that this estimate is based on analysts' revenue forecasts. Even if the growth rate slows, as long as its FCF margins stay over 53.5% it's likely that this price target could still hold.
Short Put Plays
One way to play this is to take advantage of the high put premiums in NVDA stock. That way, even if the stock falls, investors can buy in at a lower price, plus gain some income.
For example, look at the June 7 put option expiration period, 2 weeks from now. The $1,000 strike price (i.e., $100 post-split), which is 4.5% below today's spot price, trades for $13.00 ($1.30) on the bid side. That works out to a 1.3% yield over the next two weeks for the short seller.
Moreover, this is a good way to buy into NVDA stock, even if it falls below $1000 (i.e., $100 post-split). The breakeven price is attractive, i.e., $1,000-$13.00, or $987 (i.e., $98.70 post-split), or 5.6% below today's price.
The problem is that an investor has to secure $100,000 (i.e., 100 x $1,000) just to make $1,300 in income. After the split goes into effect, investor will only have to secure $10,000 to do this same trade, although the income made would be $130. That will make shorting puts much easier to do and could end up pushing premiums lower.
Nevertheless, so many people expect NVDA stock to fall that the general levels of put option premiums for NVDA could remain elevated. This means that it could make sense for new potential investors in NVDA stock to sell short close out-of-the-money strike prices to gain a good entry price.
The bottom line is that over the next year NVDA stock still looks undervalued. Shorting OTM puts is an attractive way to buy into the stock.
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.
