Nvidia’s Upcoming Earnings Should Give It a Good Boost Given Its Huge FCF

Nvidia (NASDAQ:NVDA) has been tumbling ever since shortly after its fiscal third quarter earnings came out on Nov. 16. Since then NVDA stock has been dropping, almost without any good reason. It hit a low of $219.44 per share on Jan. 27.

NVDA stock: an Nvidia sign outside of an office building
Source: michelmond / Shutterstock.com

That represents a drop of 34% from its peak price of $333.76 on Nov. 30, 2021. It’s almost as if Nvidia reported terrible news — which it didn’t. At this point, it’s very clear that NVDA stock has been oversold.

In fact, as of Feb. 2, the stock has floated back up slightly to $252.42. Moreover, Nvidia’s upcoming four quarter and full-year earnings are set for Wednesday, Feb. 16. There is a good chance that the semiconductor chip maker will recover much of its recent decline.

Where Things Stand For Nvidia

The simple reason is that Nvidia is likely to show huge growth in its powerful free cash flow (FCF) and its FCF margins. I wrote about this earlier this month in my article on Nvidia’s FCF and its 30% FCF margins.

Chief Executive Officer Jensen Huang told investors in the Q3 report that “demand for NVIDIA [artificial intelligence] is surging, driven by hyperscale and cloud scale-out.” This is dues to a “broadening adoption by more than 25,000 companies” for their products.

Moreover, there is every expectation that will continue with the Q4 results. Institutional investors know this and are taking advantage of the stock’s recent dip. For example, Barron’s magazine recently reported that the Royal London Asset Management firm bought more Nvidia stock, in which it already had a large position.

Barron’s magazine also wrote that independent research firm Fundstrat believes Nvidia should replace Netflix (NASDAQ:NFLX) as the “N” in the FAANG term. This is a popular term to describe a group of big tech stocks that have done extremely well.

The research firm says that Nvidia is involved in every area that is surging in popularity in technology. This includes AI, videogames, cryptocurrency, and the metaverse. As opposed to Netflix, which is knee deep in competition in the streaming wars, Nvidia seems to be “gliding” over its competition in various areas where its semiconductors are in demand.

What Nvidia Could Be Worth

We can assume that Nvidia will produce free cash flow (FCF) at a rate of 30% of its forecast 2022 sales of $41.54 billion. As a result, its FCF will reach $9.46 billion for the year ending Jan. 2023.

Using this number we can derive a potential market capitalization target for Nvidia. For example, if we divide $9.46 billion by 1% (i.e., using a 1% FCF yield metric), Nvidia could end up this year with a $946 billion market cap.

That represents a 50% gain over its existing $629 billion market cap. In other words, NVDA stock is worth 50% more than today’s price of $252.42 per share. This puts its target price at $378.63 per share.

This is similar to other analysts’ target prices, although they are not as ebullient. For example, at TipRanks, which measures 25 analysts’ target prices from reports written in the last three months, the average price target is $357.95. This represents an upside of 41.8% from today’s price.

The same is true at Yahoo Finance, which uses analyst estimates from Refinitiv. Their average price target from 42 analysts is $340.82, or just a bit below the TipRanks estimate, although below my $378.63 price target.

What To Do With NVDA Stock

It seems clear now that Nvidia is going to keep on producing huge amounts of free cash flow over the coming year. As a result, NVDA stock is not likely to stay at the price today, well below its peak.

However, patient investors might want to wait until just after the Q4 results come out on the 16th. For some reason, as seen last quarter there seems to be a “sell on the news” aspect to Nvidia’s earnings reports.

On the other hand, NVDA stock is near its trough price now. That provides a good entry price and the upcoming Q4 earnings release could act as a catalyst to push the stock higher.

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 at mrhake.medium.com and Newsbreak.com and runs the Total Yield Value Guide which you can review here.


Article printed from InvestorPlace Media, https://investorplace.com/2022/02/nvda-stock-is-coming-out-of-a-trough-based-on-its-powerful-fcf/.

©2022 InvestorPlace Media, LLC