Nvidia Stock Potential Upside and Short-Put Plays


Nvidia Corp. (NASDAQ:NVDA) could see its stock price surge by up to 26% to reach $1,141 per share, driven by robust free cash flow (FCF) margins. For existing shareholders seeking additional income, shorting out-of-the-money (OTM) put options in near-term expiry periods, presents an opportunity while awaiting NVDA’s stock to reach this target.

At the time of analysis, NVDA traded at $786.90, prompting a discussion on shorting $750 and $740 put options expiring on March 15. The premiums for these options provided 3-week yields of 2.173% and 1.932%, respectively. Given NVDA’s closing price of $878.37, these puts expired worthless, resulting in profits for short-sellers and allowing existing shareholders to benefit from NVDA’s upward movement.

The optimistic outlook is supported by NVDA’s strong FCF performance, with quarterly FCF rising to $11.2 billion, constituting 50.8% of its quarterly revenue. Analysts forecast NVDA’s revenue to reach $102.29 billion for the year ending January 2025, with a subsequent increase to $126.04 billion the following year.

Assuming a 50% FCF margin, NVDA could generate over $57 billion in FCF in the next 12 months (NTM), representing a significant increase from the $26.947 billion generated in the previous 12 months. Based on a conservative 2.0% dividend yield assumption, NVDA’s market cap would be $2.854 trillion, implying a 26.3% upside from its current market cap of $2.259 trillion.

Shorting OTM puts can provide extra income for investors. For instance, the $880 strike price expires on April 19, three weeks away, offering a yield of over 2.887%. Investors can use margin and cash to secure $88,000 per contract shorted, receiving $2,550 per put contract. However, there’s a risk of potential losses if NVDA’s stock price declines significantly.

Despite the risks, the short-put strategy offers a promising expected return, especially if consistently repeated. Over the next 90 days, repeating this short-put yield play every three weeks could result in an expected quarterly ROI of 11.59% or an annualized ROI of 46.36%.

In conclusion, NVDA’s potential upside driven by its FCF presents an attractive opportunity for long-term investors, particularly when combined with short-put plays in nearby expiry periods.

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