Nvidia (NASDAQ:NVDA) is a massive $469 billion market capitalization (cap) fabless semiconductor maker that is focused on gaming, data centers, and artificial intelligence (AI) applications. Moreover, now that the stock is now down 47% YTD and 20% for the past year, it’s starting to look interesting to value investors.
For example, analysts now estimate earnings for the year ending Jan. 30, 2023 will be $5.45 per share, according to Seeking Alpha. That represents earnings growth of 22% for the year and with $6.50 earnings per share (EPS) for Jan. 2024, 19% growth.
In other words, recession or not, analysts are still positive about the outlook for Nvidia. One Seeking Alpha author recently pointed out that Nvidia now produces more AI-related and autonomous vehicles revenue compared to its graphics card sales. They point out that the decline in the crypto markets probably dented its sales in the GPU card market.
Higher Free Cash Flow
Moreover, now that Nvidia has walked away from the massive purchase of Arm Ltd in the U.K., its free cash flow (FCF) is going to build up its cash balances.
For example, in the past quarter, Nvidia made $1.348 billion in FCF, but it should be higher without the acquisition expenses going forward. That represents a 16% FCF margin on its sales in the first quarter (Q1) of $8.288 billion.
However, its earnings include a $1.35 billion acquisition termination charge, which may have affected its cash flow. For example, in the prior quarter ending Jan. 30, Nvidia produced $2.739 billion in FCF on sales of $7.64 billion.
That represents a much higher FCF margin of 35.85%. In other words, Nvidia has the potential to double its FCF over the next year if it returns to prior FCF margins.
Where This Leaves NVDA Stock
Analysts are now targeting significantly higher price targets. For example, the average of 42 analysts surveyed by Refinitiv, as seen on Yahoo! Finance, is an average price target of $260.53 per share. That represents a potential gain of 62.2% over the price of $159.82 per share on Jun. 28.
In addition, Seeking Alpha indicates that the average of 43 analysts is $253.38, or 58.5% higher. TipRanks says that 30 analysts have written on the stock in the past 90 days and have an average price target of $266. That represents a potential 72% gain in the stock from today’s levels.
So, what is NVDA stock potentially worth? Let’s assume that it can make at least a 25% FCF margin for the year ending Jan. 30, 2024. That is when analysts forecast sales of $39.48 billion. That works out to an FCF generation of $9.87 billion — call it $10 billion.
If we assume a 2% FCF yield, or 50x FCF, the target market cap is $500 billion. That represents a 16.8% gain over its present market cap of $428 billion, or a price of $186.70 per share. But a 1.5% FCF yield, or 66.57x FCF — which is not uncommon in good times — means the market cap for NVDA stock could be $666.67 billion, or 55.8% higher. That raises the target price to $249 per share.
That is not far from the average price that other analysts are using, as pointed out above.
On the date of publication, Mark Hake did not hold (either directly or indirectly) any positions 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.