Nvidia's Free Cash Flow and FCF Margins Skyrocket - NVDA Stock Looks Cheap

Globe and Mail

2 days ago

Nvidia Inc. (NVDA) reported strong revenue, free cash flow (FCF), and FCF margins for its fiscal Q1 ended April 27, 2025. This implies a much higher valuation for NVDA stock, over $191 per share. Short put plays are also attractive here, and they have high yields.
NVDA is off today at $134.18 in midday trading. This provides a good buy opportunity for value investors, as this article will show.
I previewed Nvidia's FCF and FCF margins and a valuation (price target) in my May 25 Barchart article. I suggested NVDA was worth $161.48.
Now, I'm upgrading this target to over $191 per share. That represents a potential gain of 43% above today's price. Here's why.
Strong Free Cash Flow (FCF)
Nvidia's Q1 revenue of $44.06 billion was stronger than guided for the quarter (my estimate was $43.2 billion). That represented a gain of almost 12% over the prior quarter (+11.9% from $39.331 billion).
The same was true for its adjusted gross margin (i.e., 71.5% vs. management's guidance of up to 71%). However, the astounding news was its free cash flow (FCF) and FCF margins.
This can be seen in the table below. It shows that its FCF skyrocketed 68% over the prior quarter and 75% YoY.
More importantly, it shows that as a percent of revenue, i.e., its FCF margins, Nvidia's results were stellar. The FCF margin rose to over 59% from about 40% in the prior quarter and 57% a year earlier.
In addition, its capital expenditures (capex) rose from $1.077 billion last quarter to $1.227 billion in Q1.
In other words, Nvidia's management has been squeezing more cash out of operations, despite higher capex spending and higher revenue. This is a sign of operating leverage - i.e., FCF rises as a percent of revenue as sales rise.
The bottom line is that this has huge implications for the value of Nvidia stock. I was previously expecting a FCF margin of just 39.5%. With its recent 59.3% FCF margin, the company has generated significantly more FCF as a percent of revenue over the last year.
For example, Seeking Alpha now shows that the trailing 12-month (TTM) operating cash flow ending April 2025 was $76.158 billion. After deducting $4.094 billion in capex spending over the last year, its FCF was $72.064 billion.
That represented 48.5% of its TTM revenue of $148.515 billion, according to Seeking Alpha. We can use that FCF margin to estimate FCF going forward.
Price Targets for NVDA Stock
Analysts now project that revenue this year ending Jan. 31, 2026, will rise to $199.75 billion and $251 billion next year. That puts it on a run-rate revenue for the next 12 months (NTM) of $225 billion.
So, to be conservative, let's say that FCF margins will average 48% over the next 12 months (NTM):
$225b NTM sales x 48% FCF margin = $108 billion FCF est.
This is significantly higher than the $76 billion it made over the last 12 months ($76.158 billion) and $60.85 billion it made in 2024.
As a result, the market is likely to give NVDA stock at least a 2.3% FCF yield (i.e., a 43x multiple). Here is how that works:
$108b x 43 = $4,644 billion, or $4.64 trillion market value
That is 18.8% higher than today's market value of $3,256 billion, according to Yahoo! Finance.
In other words, NVDA stock is worth 42.6% more than its price today of $134.18:
$134.18 x 1.426 = $191.34 p/sh
This means over the next year, if Nvidia averages a 48% FCF margin, its market value and price could rise 43% from today's price.
Analysts tend to agree. Barchart reports that the mean price is $167 with a high of $220. AnaChart's average price target is now $177.68 from 40 analysts. That is up from $169.78, as I reported last week.
Shorting OTM Puts
However, this could take a while to occur. One way to set a lower buy-in target, or, for existing shareholders, to get paid while waiting for the stock to rise, is to short out-of-the-money (OTM) put options.
For example, the July 3 put options at the $130 strike price (i.e., 3% below today's price) have a midpoint premium of $4.73. That represents an immediate yield of 3.64% ($4.73/130 = 0.03638) to a short-seller.
However, this is fairly close to today's price, and more risk-averse investors may want to set a lower put strike price. The $128 put option has a premium of $4.00, but that is still a very high yield of 3.125% (i.e., $4.00/$128.00 = 0.03125).
This still has a fairly high delta ratio of 33%, implying a one-third chance that NVDA could fall to $128 over the next 34 days. Typically, an investor wants to short puts with slightly lower delta ratios.
For example, the $126.00 strike price put option, 6.3% out-of-the-money, has a 27% delta ratio with a premium of $3.10 at the midpoint. That still represents a high yield of 2.46% for a short-seller.
As a result, an investor can set a series of trades that could produce an average 3.0% yield over the next month, to July 3. These would likely have an average strike price around 4.5% to 5% below today's price. The breakeven points would be even lower.
The bottom line is that NVDA stock looks very cheap here. Shorting out-of-the-money (OTM) put options in one-month out expiry periods provides high yields and lower buy-in target prices.