Nvidia Inc. (NVDA) stock still looks undervalued here, even though the stock keeps rising. This is based on higher analyst revenue and FCF estimates. This creates a good short-put play, especially for existing investors.

NVDA stock is up 3.5% today to $918.44. But it is still worth over $1,000 per share. This is based on analyst target prices and also an analysis of the value of its huge free cash flow (FCF).

But the market is still scared about its valuation. That has pushed up its put option premiums. That presents an excellent shorting opportunity for investors who sell short out-of-the-money (OTM) put options in nearby expiry periods.

Shorting OTM Puts in NVDA Stock

I discussed this in my last Barchart article on April 18, “Nvidia Stock Still Looks Undervalued - Good for Investors Who Sell Short OTM Puts for Income.” 

The May 3 expiration put option at the $850 strike price was trading for $20.80 on the bid side. That provided a 2.45% income play (i.e., $20.80/$880.00). This strike price was 3.6% out-of-the-money (OTM) as NVDA stock was at $881.86 on April 18.

As it turns out the stock closed at $887.89, so these puts stayed out-of-the-money. Existing investors who owned NVDA stock made money in two ways. First, they made the 2.45% income by shorting these OTM puts. And they also gained the upside in the stock.

This can be done again today, especially since NVDA stock still looks undervalued. Let's review the price targets for the stock.

Price Targets for NVDA Stock

Based on analyst estimates, Nvidia could generate $62.5 billion in free cash flow over the next 12 months (NTM). That is based on a 50% FCF margin forecast, (it made 51% FCF margins last quarter). 

So, using analysts' revenue estimates of $112.07 billion in revenue this year and $137.81 billion next year (Seeking Alpha) and multiplying the average NTM revenue of $124.94 billion by 50%, we get a NTM FCF estimate of $62.47 billion.

Next, using a 2.25% FCF yield metric (which is the same as multiplying FCF by 44.44x, Nvidia's market cap could rise to $2.78 trillion. That is 21% higher than Friday's market cap of $2.294 trillion.

In other words, NVDA stock is worth at least 21% more than $887.89, or $1,074.35 per share. That is still 17% higher than today's price. 

Moreover, other analysts agree that NVDA has a higher price target. For example, Barchart's survey of 38 analysts shows that the average price target is $955.78. Refinitiv's survey (Yahoo! Finance) has an average price target of $1,008.90 for 47 analysts. AnaChart, a new sell-side analyst tracking service shows that the average of 38 analysts' target prices is $992.10.

The bottom line is that all analysts see a significant upside in NVDA stock. That means shorting OTM puts again might make sense here, especially for long investors in the stock.

Shorting OTM Puts in NVDA Stock

Look at the May 31 expiration option chain for NVDA put options. This is 25 days from today. It shows that out-of-the-money (OTM) put options still have high premiums. That makes shorting them a potentially profitable play.

For example, look at the $880 strike price puts. It shows that the bid-side premium is $40.90, or a 4.67% put yield (i.e., $40.90/$880). That is for a strike price that is over 4.0% below today's price.

Moreover, the $870 strike price has a premium of $36.80 per contract with a strike price that is 5% below today's price. That provides a short seller with a bid side yield of 4.22%. These are extremely high yields compared to many other stocks.

It also has a high level of risk. For example, unless the stock stays above $870 or $880 in the next 3 weeks or so, the short-put investor may have to buy more shares. The implied volatility is high at over 63.5%. That means the stock could fall significantly from here, based on its average price fluctuations.

However, there is good downside protection on a breakeven basis. For example, the investor who shorts the $870 strike price has a breakeven level of $870-$36.80, or $833.20 per share. That is almost 10% below today's price. And remember this is for just 25 days.

Moreover, the short seller does not have to hold this play until expiration. In the next two weeks, if the stock does not fall significantly, the put option premium is likely to be much lower. That allows the investor to cover their short play and potentially roll it over to another period, booking the profit.

The bottom line is that NVDA stock still has a good upside. For existing investors, one way to play this is to short OTM puts. That way they can take advantage of the high put option premiums to gain extra income, as well as make money if the stock moves higher. The extra income also helps hedge any short-term downside in their long position in NVDA stock.

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