Nvidia’s Investment Potential and Strategies

Nvidia Inc. (NVDA) is seeing opportunities for investors to lower their costs based on free cash flow (FCF) price targets. There’s talk about using out-of-the-money (OTM) options to gain a yield of about 2.4% each month, which could offer an attractive potential entry point with a lower strike price.

On Friday, June 20th, shares of NVDA closed at $143.85. I mentioned in my previous analysis from May 30th that the appropriate value for NVDA stocks could be around $191.34 per share, suggesting an increase of about 33% from the closing price.

This article delves into one strategy—selling OTM puts—which might help investors lock in lower buying prices while simultaneously earning payments from these options.

Before diving deeper, let’s look at Nvidia’s free cash flow and the associated price targets.

From my last analysis, Nvidia’s Q1 FCF was reported at $2.6125 billion, which astonishingly represents approximately 59.3% of their quarterly revenue. Essentially, this indicates that nearly 60% of their sales directly contributes to their profits without substantial cash expenditures, despite impressive investment in capacity.

Moreover, the FCF margin stands at nearly 50% over the past year, specifically around 48.5%. If this trend continues, we might expect FCF levels to reach new heights.

For instance, predicting a 50% FCF margin in light of an analyst’s forecast of $225 billion for the next 12 months could lead to an FCF outcome of over $112.5 billion.

To evaluate Nvidia, consider what the market anticipates. If we assume they aim for a $100 billion FCF, that equates to a yield of about 2.85% based on the current market cap of $350 billion.

A forecast of $112.5 billion for next year’s cash flow would bring Nvidia’s market cap to around $3.75 trillion.

This suggests a noteworthy potential increase of 12.5% from the existing market capitalization. Thus, the target price is likely to rise by at least that percentage.

Calculating this, a price of $143.85 multiplied by 1.125 leads us to a projected price of approximately $161.83.

Should Nvidia achieve a better-than-expected FCF margin next year, the target could soar even more, potentially even 24% higher if margins improve significantly.

This aligns fairly well with other analysts’ projections, which typically suggest price targets around $172.60 to $179.87 per share, according to various surveys.

Nonetheless, there’s always a level of uncertainty regarding whether Nvidia will meet these expectations in the upcoming year. A practical approach is to sell short OTM options for a brief validity period.

In prior discussions, a good strategy was to sell a short strike price of $128, which provides a 3.125% yield and was well beneath the trading price. The context makes it worth noting that this price has since diminished to a premium of just 39 cents. In this case, the accrued yield stands at roughly 2.82%.

It makes sense to roll over these positions, essentially buying back the short puts at a lower rate and repositioning at a marginally higher strike price for an additional month.

For example, if we look at options set to expire on July 25th—with a strike price around $137—this option still holds value even under existing market conditions, providing an expected yield of about 2.48%.

Even maintaining lower risk options could yield around 2.70% for slightly higher strike prices. The takeaway here is that the rolling strategy provides a decent net yield on the $137 puts, still at about 2.20%.

When all is said and done, this strategy could yield a total of about 5.02% over two months, yielding an average of around 2.51%.

If NVDA dips to $137 next month, breakeven points for investors would hit around $133.60 per share, which is approximately 7.125% below last Friday’s price. For new investors, this offers a means to establish a lower buy-in point, and for current investors, it functions as a way to lower average costs while generating extra income.

As long as the target price of $172.60 is maintained, this strategy carries the potential for a significant upside of about 29% or more.

Ultimately, delving into these OTM puts could provide investors with a pathway to earn over 2% in the near term.