I’ve been wrong about Nvidia (NASDAQ:NVDA) before. I recently revisited the company, and the huge growth it posted recently. I now believe NVDA stock could in fact double from current levels.
My new price target is $1,654 per share, up 94% from today’s price (June 30) of $803. After the upcoming 4-for-1 stock split on July 19, my new target would be $413.50, up from the adjusted price today of $200.75 after the upcoming split.
Estimating Nvidia’s Free Cash Flow
Nvidia had amazing growth for the quarter ending May 3, its fiscal Q1 2022. Revenue rose 84% year-over-year (YoY)and was even up 13.15% over the prior quarter (QoQ). The latter is important since it implies that near-term growth is still high. For example, if we assume that the 13.15% growth compounds over the next year, the company will have 63.9% revenue growth on a YoY basis.
This is how we can estimate its growth going forward. Nvidia was very helpful in that it said that it expects its Q2 revenue will be $6.3 billion, plus or minus 2 percent. That is a very specific projection and gives us a lot of confidence.
Therefore, since it made $5.661 in sales during Q1, we can estimate that Q2 sales will be up 11.29% next quarter. On a compounded YoY basis, this implies that the next 12 months (NTM) sales will be up 53.4% (i.e., (1.1129 ^4)-1 = 0.534). As a result, sales a year from Q2 will be $8.684 billion, and $34.736 billion annualized.
Next, we apply the company’s present free cash flow (FCF) margin percentage, which is very high, to those sales estimates. For example, in Q1, Nvidia made $1.874 billion in cash flow from operations (CFFO). After deducting $298 million in capex spending from CFFO, Nvidia’s FCF was $1.58 billion for the quarter. Since it made $5.661 billion in sales, the FCF margin was 27.9% (i.e., $1.58b/$5.661b).
As a result, if we multiply 27.9% by the NTM sales estimate of $34.736 billion, FCF will be $10.316 billion. This is huge growth. For example, in the last 12 months to Q1 FCF was just $5.5 billion, according to Seeking Alpha. For example, CFFO was $6.787 billion and capex spend was $1.71 billion.
What NVDA Stock is Worth
We can now use this $10.3 billion estimate of FCF to value NVDA stock. For example, at a 1% FCF yield, the value of NVDA stock is worth $1.031 trillion. This is over twice (+106%) its market capitalization of $500.33 billion on June 30. In other words, NVDA stock is worth $1,654 per share, up 106% from $803 per share today.
As I mentioned earlier, the company will complete a 4-for-1 stock split on the record date of July 19. Therefore, today’s price is equivalent to $200.75, and my post-split price target is $413.50. The split will make the stock more affordable for certain retail investors, potentially stoking investor demand and moving NVDA stock higher as well.
The bottom line here is that the company is still on a very serious growth path, despite its huge market value. This is based on the company’s own forecasts for demand for its gaming and data chipset products. Nvidia already reflects this growth in its valuation, as it trades for 50 times earnings and 25 times sales, according to Seeking Alpha.
But I have shown that its huge growth and its massive free cash flow will likely cause the stock to move even higher. Expect to see NVDA double over the next year.
On the date of publication, Mark R. Hake did not hold a position in any security mentioned in the article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.