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Broadcom Inc. (AVGO) impressed the market with its 39% free cash flow (FCF) margins for Q4 ending Oct. 31. Moreover, based on guidance from Broadcom's bullish AI revenue outlook, analysts have substantially raised revenue forecasts. As a result, AVGO stock could still be significantly undervalued.
AVGO stock is up 22.5% today at $221.54, up from $180.66 yesterday. But it may still have a way to go.
I previously discussed Broadcom's strong FCF margins in my Sept. 8 Barchart article, “Broadcom Generates Strong Free Cash Flow - AVGO Stock Could Be Too Cheap Here.” At the time I suggested that AVGO could be worth over 40% more at $191.80. That price target has already reached.
Today I believe that AVGO stock could be worth 18% more at $262 per share. This article will discuss why.
Strong Free Cash Flow and Outlook
The semiconductor producer Broadcom reported that its Q4 revenue was up 51% YoY, and its FY 2024 revenue rose 44% to $51.57 billion. Moreover, the company guided that it expects by 2027 its AI chips could propel revenue to over $90 billion by FY 2027.
Moreover, based on the company's guidance analysts now project revenue next year will rise $61.29 billion and to $69.14 billion, for the year ending Oct. 2026. This is up significantly from three months ago when analysts had $60.34 billion in revenue forecasts.
As a result, based on the company's huge free cash flow (FCF) margins, it's likely that free cash flow could grow significantly.
For example, last quarter its FCF rose to 39% of sales, up from 36.7% land 36.0% in Q2. Even though this was lower than 50% last year, it shows that the FCF margin is improving.
Therefore, based on an expectation that the company could improve to 40% FCF margins over the next 2 years, free cash flow could exceed $26 billion:
($61.29 b revenue Oct. 2025 + $69.14 b FY 2026) /2 = $65.22 b on average next 2 years
$65.215b revenue x 0.40 = $26.086 billion Free Cash Flow (FCF)
As a result, the stock's value could rise significantly even though it is up today.
Target Price Based on FCF Outlook
One way to value a high FCF-generating company is to use an FCF yield metric. This assumes that the company could theoretically pay out 100% of its FCF in both dividends and buybacks.
As a result, the market will give the stock a full dividend yield valuation. In this case, based on AVGO stock's history and comparables, it could end up with a 2.0% dividend yield. Here is how that works:
$26b FCF / 0.02 FCF yield = $1,300 billion market cap
If the market eventually values AVGO stock with a 2.0% FCF yield, based on projections of $26 billion in FCF, its market cap will rise to $1.3 trillion.
This is 25% higher than its market cap today of $1.039 trillion.
In other words, AVGO stock could be worth 25% more or $277 per share. Moreover, even using a lower valuation such as a 2.25% FCF yield, the market cap would be $11.2% higher at $1,156 billion. That means AVGO stock would be worth $246 per share.
So, on average the expected value (EV) is between $246 and $277 per share, or $261.50, which is 18% higher than today.
The bottom line is that despite today's rise, and even if there is a pull-back, investors can expect over the next 12 months that its value could rise.
One way to play this is to set a lower buy-in price target by shorting out-of-the-money (OTM) puts. The investor can make income this way while waiting for the stock to fall to a lower point.
Shorting OTM Puts
For example, put options expiring in three weeks on Jan. 3, 2025, trade for $1.54 on the bid side for the $200 strike price. T
That provides short sellers an immediate short-put yield of 0.77% (i.e., $1.54/$200.00) for a price that is almost 7% below today's trading price.
This can be seen in the Barchart put option chain table above. This way the investor knows that their $200 buy-in target price actually has a lower breakeven of $200 - $1.54, or $198.46 per share.
For less risk-averse investors, the $205 strike price puts trade for $2.51. That provides a higher short-put yield of 1.22% (i.e., $2.51/$2.05), with a breakeven of $202.49 per share, which is 6% or more below today's price.
The bottom line is that this is one way investors can set a lower buy-in price target and still get paid while waiting.
