Nvidia Inc. (NVDA) holds the potential for a 33% surge in its stock value if its free cash flow (FCF) margins uphold the lofty average of 47.5%. This means existing shareholders could harness significant upside, especially through shorting out-of-the-money (OTM) puts to generate income.
NVDA stock is currently trading below its recent peak at $870.28. However, with its exceptional FCF margins averaging at 47.5%, the stock has the potential to climb as high as $1,153 per share.
Capitalizing on Previous Success
In a previous instance highlighted in a Barchart article dated Feb. 25, I outlined an opportunity with Nvidia stock when it was priced at $786.90. The suggestion was to aim for a value of $1,016 per share. By selling short the March 15 $750 strike price put option, investors secured an immediate yield of 2.173%. This move proved advantageous as the put expired worthless, allowing investors to pocket the income without any obligation to purchase shares at $750.
Repeating this strategy could be profitable amid Nvidia’s high FCF margins, paving the way for a renewed opportunity.
Unlocking Value Through Free Cash Flow Analysis
One method to gauge Nvidia’s valuation involves assuming the continued presence of its robust FCF margins. By utilizing FCF yield as a metric, a price target can be established.
For instance, in the last quarter, Nvidia generated $11.217 billion in FCF from quarterly revenue of $22.103 billion, resulting in an impressive FCF margin of 50.75%. Over the previous 12 months, the FCF margin stood at 44.2%, amounting to $26.947 billion FCF from $60.922 billion in revenue.
Based on an anticipated average FCF margin of 47.5%, projections foresee a revenue of $110.91 billion for the year ending Jan. 2025. This figure escalates to $121.6 billion in the following year. With a hypothetical 2.0% dividend yield from the 50.75% FCF margin, Nvidia’s valuation may ascend to $2,888 billion in the next 12 months, signifying a potential price target of $1,153 per share.
Through the lens of FCF margins, Nvidia emerges as a promising investment avenue. Leveraging this outlook, shorting OTM put options emerges as a prudent approach for both income generation and cost-effective stock entry.
Shorting OTM Puts for Income
Considering the upcoming April 12 expiration period, where the $840 strike price put options trade at $27.85 per put contract, a short-seller could realize an immediate yield of 3.315%. This move unlocks income by securing $84,000 per contract, enabling investors to capitalize on stock price fluctuations while safeguarding an 8.30% downside protection compared to the current price.
By understanding the potential waiting to be unlocked via Nvidia’s FCF margins, investors can strategically position themselves to capitalize on the stock’s contemplated growth to $1,153 per share in the next 12 months.
Therefore, engaging in short OTM puts, particularly for existing shareholders, offers a prudent strategy to augment income or secure a more affordable entry point into Nvidia stock.
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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.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
