Nvidia (NASDAQ:NVDA) has been trading around $200 (following a recent 4-to-1 split) for a while now. In the past month, NVDA stock has stayed mostly level, going from a July 6 close of $206.99 to $194.44 on July 28.
The concern is that Nvidia’s huge $40 billion cash and stock purchase of the UK semiconductor company Arm Limited from Softbank (OTCMKTS:SFTBY) is having closing difficulty. The deal was announced almost a year ago in Sept. 2020 and has yet to receive the UK and European regulatory sign-off.
As a result, if the deal begins to falter and the companies cannot close the transaction, NVDA stock could take an even bigger hit. But that would be an opportunity to get the stock cheaply for most serious long-term investors. The reason is clear. Nvidia is a free cash flow (FCF) powerhouse.
Nvidia’s Free Cash Flow
Nvidia had huge growth for the quarter ending May 3, its fiscal Q1 2022. Revenue rose 84% year-over-year (YoY) to $5.661 billion and was up 13% over the previous sequential quarter. Nvidia has announced that it will release its Q2 results on August 18.
But more importantly, its free cash flow was very high at $1.557 billion. In other words, its FCF margin was 27.47%. That means that 27.5% of every sales dollar goes straight into its cash balance, even after all possible expenses and payments by the company, except for principal debt payments. That is very important since we can use this to estimate its FCF going forward.
One way to do this is to take a look at the trailing 12 months (TTM) FCF margin and then use that to estimate its future FCF. Seeking Alpha shows that the TTM Q1 revenue was $19.256 billion. Moreover, its TTM cash flow from operations (CFFO) was $6.787 billion and its capital expenditure spending was $1.271 billion. Therefore, its TTM FCF was $5.516 billion. In other words, the TTM FCF margin was 28.65%. Let’s use that going forward.
Analysts surveyed by Seeking Alpha now estimate that sales for the year ending Jan. 2022 will be $24.89 billion. And next year they forecast sales of $27.55 billion. So if we use the 28.65% FCF margin estimate, this means by the end of 2022 FCF generation will be $7.893 billion. That is 43% over the TTM FCF for the year ending May 3.
What NVDA Stock Is Worth
We can use this $7.89 billion FCF estimate to value NVDA stock. Using a 1% FCF yield metric, the stock has a target market value of $789.3 billion ($7.893 billion / 1% = $789.3 billion).
Compare that to its present market capitalization of $486.5 billion. This implies that Nvidia is worth 62.24% more than its present value. In other words, NVDA stock has a target price of $317.08, (i.e., 62.24% over its price of $195.44, as of July 28).
What To Do With NVDA Stock
However, sell-side analysts are not as sanguine as I am. For example, TipRanks reports that the average price target of 29 analysts is just $202.56, or slightly over (+3.6%) today’s price. The same is true with other analyst survey sites.
I suspect that they are concerned that the Arm deal may not close. Seeking Alpha came out with a report recently saying that Arm Holdings is considering going public if the Nvidia purchase does not gain European regulatory approval.
But as I have shown, if this happens and NVDA stock falls, it presents a huge buying opportunity for long-term investors. This is because of the huge FCF that the company already generates even without the Arm Holdings deal. The bottom line is that NVDA is worth 62% more at $317.08 per share.
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.
Mark Hake writes about personal finance on mrhake.medium.com and runs the Total Yield Value Guide which you can review here.
