Nvidia Seems to be 22% Undervalued Right here Primarily based on Projected FCF Margins

Nvidia, Inc. (NVDA) inventory seems at the least 22% too low-cost right here, based mostly on its robust free money stream (FCF) margins (i.e., utilizing a 39% FCF margin) and utilizing a 2.0% FCF yield valuation metric. Put premiums are excessive, making shorting out-of-the-money places enticing.

NVDA closed at $188.15 on Friday, Nov. 7, off its current peak of $206.88 on Nov. 3. But it surely might be value as a lot as $230 per share, or over 22% larger, based mostly on its robust FCF. This text will present why.

For the quarter ended July 27, 2025 (fiscal Q2), Nvidia generated $13.45 billion in free money stream on $46.743 billion in income. That works out to a quarterly FCF margin of 28.8%.

Prior to now three quarters, in accordance with Inventory Evaluation, its FCF margins have been: 59.43% (Q1), 39.54% (This fall 2024), and 47.93% (Q3 2024).

Meaning its trailing 12 months (TTM) FCF margin has averaged 43.9%. We are able to use that to estimate its FCF going ahead.

For instance, let’s assume that over the following 12 months (NTM), the FCF margin might be simply 39%. Here is why.

If Nvidia makes the same Q3 (with its upcoming launch of earnings on Nov. 19) FCF margin of 29% as in Q2, its TTM margin might be as follows:

Q3 ….. 29.0%, Q2 ….. 28.77%, Q1 ….. 59.43%, This fall 2024 …. 39.54%

TTM Common as of Q3:  39.15%

So, to be conservative, let’s use a 39.0% FCF margin for the following 12 months (NTM). For instance, analysts now mission that income for the 12 months ending January 2027 might be $287.24 billion:

0.39 x $287.24 billion = $112.02 billion FCF NTM

We are able to use that to set a value goal, utilizing a FCF yield metric.

This metric assumes that 100% of FCF is paid out to shareholders. What would the dividend yield be? Nicely, one clue is by dividing Nvidia’s TTM FCF by its current market cap.

For instance, in accordance with Inventory Evaluation, as of Q2, it has generated $72 billion in TTM FCF, and Yahoo! Finance experiences that Nvidia’s market cap is now $4.581 trillion:

$72b / $4,581b = 0.159 = 1.59% FCF yield

So, simply to be conservative, let’s use a barely worse FCF yield metric, say, 2.0%. Meaning, in concept, if Nvidia have been to pay out 100% of its $112 billion in FCF subsequent 12 months as a dividend, the dividend yield can be 2.0%.

The place would that depart its market cap within the subsequent 12 months (NTM):

$112b / 0.02 = $5,600 billion market cap NTM

In different phrases, its market cap would rise by 22%:

$5,600b NTM market / $4,581b mkt cap right this moment = 1.2224 -1 = +22.24% upside

That means that the goal value (earlier than any share buybacks) is 22.24% larger than right this moment’s value, or $230 per share:

1.2224 x $188.15 = $230.00 NTM value goal

In different phrases, utilizing conservative FCF margin and FCF yield assumptions, NVDA inventory might be over 22% undervalued.

Consequently, it is smart to search for a very good entry level. A method to do that is to promote brief out-of-the-money (OTM) put choices.

Given the current volatility out there and NVDA inventory, its put choice premiums are larger than regular. That makes them enticing to short-sellers in an effort to set a decrease potential buy-in level.

For instance, the Dec. 12, 2025, expiry interval reveals that the $170.00 strike value put choice strike value, which is nearly 10% beneath right this moment’s value, has a really excessive midpoint premium of $4.60 per put contract.

Meaning a short-seller of those places, after securing $17,000 in collateral, can earn $460 over the following month. That works out to a yield of 2.71% (i.e., $460/$17,000 = 0.0270588).

This additionally units a a lot decrease potential breakeven level, even when NVDA falls 10% to $170.00 on or earlier than Dec. 12:

$170.00 – $4.60 = $165.40 breakeven

That’s 12% beneath or $22.75 decrease than Friday’s shut. So, it supplies an enormous potential upside to a short-seller, assuming NVDA rises to $230.00 over the following 12 months:

$230.00 / $165.40 breakeven = 1.39 -1 = +39% upside

Furthermore, for much less risk-averse buyers, shorting the $175.00 put choice supplies larger earnings, though the delta ratio is barely larger (i.e., 29% likelihood of NVDA falling to $175.00, vs. 23.53% likelihood of it falling to $170.00).

For instance, the yield is far larger with the premium at $6.05:

$6.05/ $175.00 = 0.03457 = 3.457% short-put yield over one-month

However the breakeven level continues to be low at $175.00 – $6.05, or $168.95, or -10.2% beneath Friday’s shut.

The underside line right here is that shorting out-of-the-money (OTM) places like these two contracts supplies a very good yield and potential upside for brand spanking new NVDA buyers.

On the date of publication, Mark R. Hake, CFA didn’t have (both immediately or not directly) positions in any of the securities talked about on this article. All info and knowledge on this article is solely for informational functions. This text was initially printed on Barchart.com