Nvidia (NASDAQ:NVDA) had a very good year in 2021. NVDA stock rose from a closing price of $130.44 on Dec. 31, 2020, to $291.11 on Dec. 31. This means it rose 123% during 2021, which is a fantastic return.
Moreover, NVDA stock has spiked since Oct. 4 when it bottomed out at $197.30, up over about 41% in the past three months.
But since Nvidia peaked at $346.47 on Nov. 22, NVDA stock has fallen to $278.30. This represents a drop of 19.7% from its peak.
However, despite this decline, based on Nvidia’s forecasted free cash flow (FCF), especially if the ARM acquisition goes through, NVDA stock will likely surge again.
Where This Leaves Nvidia Going Forward
On Nov. 17, Nvidia released its Q3 earnings for the quarter ending Oct. 31, showing that revenue was up 50% year-over-year to $7.1 billion.
Chief Executive Officer Jensen Huang, who is also the founder of the company, said that “Demand for NVIDIA [artificial intelligence] is surging, driven by hyperscale and cloud scale-out.” He also said that there was “broadening adoption by more than 25,000 companies” for their products.
Moreover, Nvidia produced an operating profit of $2.671 billion on the $7.1 billion in revenue, or a 37.6% operating margin. FCF was reported by the company as $1.276 billion for the quarter. This implies that its FCF margin was 18%.
In addition, for the nine months ending Oct. 31, the company’s FCF was $7.9 billion. And compared to its nine-month revenue of $19.27 billion, the FCF margin was around 41%.
Valuing NVDA Stock
Analysts now forecast that revenue will rise to $35.1 billion for the year ending Jan. 2023. This represents an 18.1% growth rate over the $26.68 billion revenue forecast for the year ending Jan. 2022.
So even if we apply a lower 30% margin to the $35.1 billion revenue forecast, the FCF forecast will be $10.5 billion. As a result, using a 1% FCF yield metric, the value of the stock is worth $1,050 billion, or $1.05 trillion.
Now compare this to the existing market value of Nvidia. As of Jan. 12, it was $698 billion. As a result, NVDA stock should be worth at least 50.9% higher than its price today (i.e., $1,050b/$698b -1=0.591).
That also implies that NVDA stock should trade 51% higher than its price today by sometime during 2022, assuming these forecasts pan out. This puts its price target at $422.50 per share (i.e., $1.509 x $279.99).
Analysts’ Views On Nvidia Stock
So far, analysts on Wall Street are still positive on NVDA stock, albeit not as enthusiastic as I am. For example, according to Seeking Alpha, there are 42 analysts who have written price targets on the stock. But their average price is $335.41 per share. That implies an upside of just 20% from today’s price.
The same is true at Yahoo! Finance, which uses analyst estimates from Refinitiv. Their average price target from 41 analysts is $341.20, or just slightly over the Seeking Alpha estimate.
Moreover, at TipRanks.com, which measures analysts’ target prices from reports written in the last three months, the average price target is $359.17. This is from 26 analysts’ reports. This is closer to my $422.50 price target, but implies an upside of just 28.3% compared to my 51% higher upside target.
Nevertheless, you get the point. Wall Street still loves this stock, despite its huge runup last year. And why not? The company is gushing free cash flow, management says it will continue, and there is every likelihood this will happen.
What To Do With NVDA Stock
I don’t think it matters too much that there is a discrepancy between my higher upside price target and the average Wall Street target.
Keep in mind that many of the Wall Street estimates include a contribution from the U.K. ARM Group. This is a major semiconductor firm that Nvidia agreed to acquire last year from Softbank (OTCMKTS:SFTBY). So far the deal has not closed.
If there is any delay in that $40 billion acquisition, analysts’ estimates for 2022 revenue and cash flow could fall down and that might lower their price targets. However, so far the U.K. government seems to be behind it, but a final ruling has not yet been reached.
Nevertheless, given this risk, I suspect that NVDA stock still looks like a good bargain here and is worth up to 51% more than its present price.
On the date of publication, Mark R. Hake did not hold any position (either directly or indirectly) in the securities mentioned in this 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 Newsbreak.com and runs the Total Yield Value Guide which you can review here.
