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.

On the date of publication, Mark R. Hake, CFA did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.