Despite Impressive Results, Nvidia Stock May Be Stuck in a Range - What's the Best Play?

Nvidia, Inc. (NVDA) produced impressive fiscal Q2 revenue and earnings, but its free cash flow (FCF) and FCF margins were lower than in Q1. NVDA may be stuck in a trading range, despite analysts' higher price targets. As a result, shorting out-of-the-money (OTM) puts might be the best play here.

NVDA fell on Friday, Aug. 28, to $217.55 . That's only slightly higher than before it released its results on Aug. 26 ($213.05 on Aug. 25).

Moreover, NVDA stock has essentially been flat for the past 4 months since the end of April (i.e., NVDA was at $216.61 on April 27). That can be seen in the Barchart chart below.

I discussed shorting NVDA cash-secured puts a week ago in the Aug. 23 Barchart article, " Nvidia Stock Is Treading Water Ahead of Earnings This Week - What's the Best NVDA Play? "

At the time, NVDA was at $214.72. I showed that investors could earn $4.48 shorting the $200.00 strike put expiring Sept. 25. That works out to a 2.24% one-month yield.

As of Friday, Aug. 28, the put premium had fallen to just $1.98, so over half the income yield has been made already, even though NVDA stock is only up slightly.

So, now, it makes sense to roll this play over. First, let's look at Nvidia's updated valuation after its latest earnings and cash flow results.

Despite generating much higher Q2 revenue than the market and analysts expected (i.e., $96.2 billion vs. $92.07 billion forecasted, as I pointed out in my Barchart article), free cash flow (FCF) came in lower than expected.

FCF in Q2 was $21.34 billion, much lower than the $48.554 billion last quarter, although that was much higher than the $13.45 billion FCF last year.

Moreover, the FCF margin was much lower, as the table above shows (the FCF margins, i.e., FCF/ revenue, were taken from Stock Analysis data). For example, the Q2 FCF came in at 22.2%, lower than 59.5% in Q1 and 28.8%, according to Stock Analysis.

And over the past year, FCF represented almost 42% of revenue, down from 47% in Q1 and 43.6% in Q2 last year (over the prior 12 months).

Maybe FCF margins will decline as revenue increases. But it does affect the valuation.

Analysts now project revenue will be $665.4 billion next year (year ending Jan. 2028), or 62% higher than the $410.86 billion expected this year.

Moreover, Nvidia's CEO, Jensen Huang, told Fox Business in an interview after the earnings on Aug. 26 that all of its chip capacity and revenue had been presold through next year. He told Fox that "demand is accelerating."