Is NVIDIA Corporation (NVDA.US) pulling back for entry opportunities? The model calculates that the stock price is undervalued by 22%, with a target price of $230.

On November 7th, the stock price of NVIDIA Corporation (NVDA.US) closed at $188.15, down from the recent high of $206.88 set on November 3rd. Analysis indicates that based on its strong free cash flow, its per-share value could reach up to $230, about 22% higher than the current price. Based on its strong free cash flow ratio (using a 39% free cash flow ratio) and a 2.0% free cash flow yield valuation indicator, NVIDIA Corporation's stock currently appears to be at least 22% undervalued. Selling out-of-the-money put options has become quite attractive due to the high option premiums. Strong free cash flow ratio and free cash flow forecasts As of the quarter ending on July 27, 2025 (i.e. the second quarter of the fiscal year), NVIDIA Corporation achieved a free cash flow of $13.45 billion with revenue of $46.743 billion. Based on this, the free cash flow ratio for that quarter is approximately 28.8%. According to stock analysis reports, in the past three quarters, its free cash flow ratios were 59.43% (Q1), 39.54% (Q4 2024), and 47.93% (Q3 2024) respectively. This means that its trailing twelve months (TTM) free cash flow profit margin averages 43.9%. If NVIDIA Corporation's free cash flow ratio in the third quarter (to be announced on November 19) remains at 29%, then its TTM ratios would be as follows: 29.0% (25Q3), 28.77% (25Q2), 59.43% (25Q1), 39.54% (24Q4), TTM average until the third quarter: 39.15%. Estimating future cash flows based on this, assuming a free cash flow ratio of only 39% over the next 12 months (i.e. the next fiscal year). Analysts currently expect annual revenue by January 2027 to be $287.24 billion: 0.39 multiplied by $287.24 billion equals $112 billion, which is the future 12-month free cash flow. Using the free cash flow yield as a measure, this indicator can be used to set price targets. Target price for NVIDIA Corporation stock based on free cash flow yield This indicator assumes that all free cash flow is distributed to shareholders. So, what would the dividend yield be? One reference data is to divide NVIDIA Corporation's recent four-quarter free cash flow by its current market value. For example, the stock analysis report states that as of the second quarter, the company has achieved $72 billion in free cash flow over the past 12 months. And NVIDIA Corporation's market value is currently $4.581 trillion: $72 billion / $4.581 trillion = 0.159 = 1.59% free cash flow yield. Therefore, a conservative estimate is to use a free cash flow yield indicator of 2.0%. This means that theoretically, if NVIDIA Corporation were to distribute all $112 billion of its free cash flow next year as dividends, the dividend yield would be 2.0%. So, in the next 12 months (i.e. the most recent full year), its market value will change: $112 billion / 0.02 = $5.6 trillion. So, its market value will increase by 22%: $5.6 trillion / $4.5 trillion market value = 1.2224 - 1 = an increase of 22.24%. This means that (before any stock buybacks), the target price is 22.24% higher than the current price, i.e. $230 per share: 1.2224 multiplied by $188.15 equals $230, which is the target price based on future profit expectations. In other words, if conservative assumptions about free cash flow ratios and free cash flow yields are used, NVIDIA Corporation stock may be undervalued by more than 22%. Therefore, it seems sensible to look for a suitable entry point, and a feasible approach is to sell out-of-the-money put options. Selling Out-of-the-Money Put Options Given the recent market volatility and the fluctuation in the price of NVIDIA Corporation stock, the premiums for put options are higher than normal levels. This makes these options attractive to short sellers, as they can set a lower potential entry point. For example, the expiration date on December 12, 2025 shows that the premium for put options with an exercise price of $170.00 (10% lower than the current price) is as high as $4.60 per contract. This means that if the sellers of these put options can get a collateral of $17,000, they can earn $460 in the next month. In percentage terms, their rate of return is 2.71% (i.e. $460 divided by $17,000 equals 0.0270588). This also significantly reduces the potential breakeven point, even if the price of NVIDIA Corporation falls 10% to $170.00 before December 12: $170.00 - $4.60 = $165.40 breakeven point, which is 12% lower than the closing price last Friday. Therefore, if the price of NVIDIA Corporation rises to $230 in the next 12 months, this would bring significant potential returns for the sellers: $230 / $165.40 breakeven point = 1.39 - 1 = a 39% increase in value. Furthermore, for investors with lower risk preferences, selling put options at $175 can yield higher returns, although the delta coefficient is slightly higher (i.e. the probability that the price of NVIDIA Corporation falls to $175 is 29%, while the probability of falling to $170 is 23.53%). For example, when the premium is $6.05, the yield would increase significantly: $6.05 / $175.00 = 0.03457 = a short-term yield of 3.457% for a one-month period. But the breakeven point remains at a lower level, at $168.95, or 10.2% below the closing price last Friday. The key is that selling out-of-the-money put options like these can bring decent returns and potential upside for new investors in NVIDIA Corporation.