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Nvidia Inc (NVDA) stock could still be undervalued here, despite its runup lately. This is based on a valuation using its powerful free cash flow (FCF) and FCF margins. That means NVDA stock could be worth $200 per share or 53% more. One way to play this is to short out-of-the-money puts.
This valuation assumes that Nvidia will make at least 53.5% FCF margins over the next year and that analysts' revenue forecasts come true. This article will explain how this works out.
NVDA stock is trading for $131 per share in morning trading on Monday, June 17. This is after the company recently split its shares effective last week on a 10-for-1 forward basis.
Strong Free Cash Flow Margins
I described the methodology of valuing Nvidia stock using FCF margins in a May 24 Barchart article, as well as an update on June 5. At the time, I suggested that NVDA stock was worth $150 per share using this method.
But since then, analysts have raised their revenue forecasts. It also appears to me that the market is looking forward to the Jan. 2026 revenue and FCF forecasts more and more. So, I decided to revise my estimates.
For example, Seeking Alpha now shows that estimates for revenue for 2025 (i.e., the year ending Jan. 2026) is now $157.38 billion. That is revised up from $154.82 billion shown in my prior articles.
Moreover, last quarter the company made $14.9b in FCF on $26 billion in revenue. That means its FCF margin was an astounding 57.35% as I showed in the May 24 article. This is up from its prior quarter's 50.75% FCF margin and the trailing 12-month (TTM) FCF margin of 49.3%.
So, if Nvidia makes at least 53.5% FCF margins over the next 12 months (NTM) we can derive its NTM FCF. This assumes revenue averages at least $138.69 billion (i.e., the average of Jan. 2025 estimates of $120 billion and Jan. 2026 revenue estimates of $157.38). As a result, multiplying 0.535 by $138.69b results in an NTM FCF estimate of $74.2 billion.
That is 88.8% over the TTM FCF of $39.3 billion. In other words, FCF is set to explode.
Target Price or NVDA Stock Based on Its FCF Estimate
This means that Nvidia could be worth significantly more using an FCF yield metric. For example, the market would likely give the stock a 1.5% dividend yield if it were to pay out 100% of that FCF.
Therefore, if we divide the NTM FCF estimate of $74.2 billion by 1.5% we get a market cap estimate of almost $5 trillion. For example, $74.2b/0.015 = 4,947 billion, or $4.95 trillion.
That is 53.1% over the market cap of Nvidia on Friday of $3.231 trillion. In other words, NVDA stock is worth 53% more, or about $200 per share.
Analysts are raising their valuation estimates. For example, AnaChart.com, a new sell-side analyst tracking service, shows that the average of 39 analysts is now $234.45 per share.
One way to play this is to sell short out-of-the-money (OTM) put options.
Shorting OTM Puts
For example, look at the July 12 expiration period, 25 days from now. It shows that the $127 strike price puts, which are 2.6% out-of-the-money (OTM), trade for $4.35 on the bid side. That represents an unusually high yield of 3.425% for the short seller of these puts.
This also means that the short seller has good downside protection. For example, even if the stock falls to $127 on or before July 12, the investor's breakeven point is $127-$4.35, or $122.65 per share. That is 6.37% below today's price.
Moreover, if the investor can repeat this trade 3 times over the next 3 months, the expected return (ER) is 3.425% x 3, or over 10% (i.e., 10.275%). This works best for existing shareholders who already own shares in NVDA. That way they can also get all the upside in the stock should the short put options play expire worthless each time. In other words, they get to keep all the put yield each time as well as the upside in NVDA stock.
The bottom line is that NVDA is worth considerably more from here. One way for existing shareholders to play this profitably is to 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.
