Nvidia, Inc. (NVDA) The stock looks at least 22% too cheap here, based on its strong free cash flow (FCF) margins (i.e. using a 39% FCF margin) and using a 2.0% FCF yield valuation metric. Put premiums are high, making shorting out-of-the-money puts attractive.
NVDA closed at $188.15 on Friday, November 7, from its recent high of $206.88 on November 3. But it could be worth as much as $230 per share, or more than 22% higher, based on its strong FCF. This article will show why.
NVDA Stock – Last 3 Months – Bar Chart – Nov 7, 2025
Strong FCF Margins and FCF Projections
For the quarter ended July 27, 2025 (fiscal second quarter), Nvidia generated $13.45 billion in free cash flow in $46,743 billion in income. That equates to a quarterly FCF margin of 28.8%.
Over the last three quarters, according to Stock Analysis, their FCF margins were: 59.43% (Q1), 39.54% (fourth quarter of 2024), and 47.93% (Third quarter of 2024).
That means your trailing 12-month FCF margin (TTM) has averaged 43.9%. We can use it to estimate your FCF in the future.
For example, let’s say that over the next 12 months (NTM), the FCF margin will be only 39%. Here’s why.
If Nvidia achieves a 29% FCF margin in the third quarter (with its next earnings release on November 19) similar to that of the second quarter, its TTM margin will be as follows:
Q3….. 29.0%, Q2….. 28.77%, Q1….. 59.43%, Q4 2024…. 39.54%
Average TTM as of the third quarter: 39.15%
So, to be conservative, let’s use a 39.0% FCF margin for the next 12 months (NTM). For example, analysts now project that revenue for the year ending January 2027 will be $287.24 billion:
0.39 x 287.24 billion dollars = $112.02 billion FCF MNA
We can use it to set a price target, using an FCF performance metric.
Target price for NVDA using FCF performance
This metric assumes that 100% of FCF is paid to shareholders. What would be the dividend yield? Well, one clue is to divide Nvidia’s TTM FCF by its current market cap.
For example, according to Stock Analysis, through the second quarter, it has generated $72 billion in TTM FCF, and Yahoo! Finance reports that Nvidia’s market capitalization is now $4.581 billion:
$72B / $4.581B = 0.159 = 1.59% FCF Return
So, just to be conservative, let’s use a slightly worse FCF performance metric, say, 2.0%. That means, in theory, that if Nvidia paid out 100% of its $112 billion in FCF next year as a dividend, the dividend yield would be 2.0%.
Where would that leave its market cap in the next 12 months (NTM)?
$112 billion / 0.02 = 5,600 billion dollars NTM market capitalization
That is, its market capitalization would increase by 22%:
NTM market of $5.600 billion / market cap of $4.581 billion today = 1.2224 -1 = +22.24% the other way around
That implies that the target price (before any share buybacks) is 22.24% higher than the current price, or $230 per share:
1.2224 x $188.15 = $230.00 NTM Target Price
In other words, using conservative FCF margin and FCF yield assumptions, NVDA stock could be undervalued by more than 22%.
Therefore, it makes sense to look for a good entry point. One way to do this is to sell short out-of-the-money (OTM) puts.
Shorting OTM NVDA Put Options
Given the recent volatility in the market and NVDA stock, its put option premiums are higher than normal. That makes them attractive to short sellers in order to establish a lower potential buy point.
For example, the December 12, 2025 expiration period shows that the put strike price of $170.00, which is almost 10% below the current price, has a very high midpoint premium of $4.60 per put contract.
That means that a short seller of these puts, after getting $17,000 in collateral, can make $460 over the next month. This is equivalent to a performance of 2.71% (i.e. $460/$17,000 = 0.0270588).
NVDA puts expiration on December 12, 2025 – Bar chart – As of November 7, 2025
This also sets up a much lower potential breakeven point, even if NVDA falls 10% to $170.00 on or before December 12:
$170.00 – $4.60 = $165.40 breakeven point
That’s down 12% or $22.75 from Friday’s close. Therefore, it provides a huge potential upside for a short seller, assuming NVDA rises to $230.00 over the next 12 months:
$230.00 / $165.40 breakeven point = 1.39 -1 = +39% the other way around
Additionally, for less risk-averse investors, shorting the $175.00 put option provides higher returns, although the delta ratio is slightly higher (i.e., 29% chance of NVDA falling to $175.00, vs. 23.53% chance of it falling to $170.00).
For example, the return is much higher at the premium of $6.05:
$6.05/ $175.00 = 0.03457 = 3.457% one month short sale performance
But the breakeven point remains low: $175.00 – $6.05, or $168.95, or -10.2% below Friday’s close.
The bottom line here is that shorting out-of-the-money (OTM) puts, like these two contracts, provides a good return and potential upside for new NVDA investors.
On the date of publication, Mark R. Hake, CFA had no (directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article are for informational purposes only. For more information, see Barchart’s Disclosure Policy here.
