Broadcom Generates Strong Free Cash Flow – AVGO Stock Could Be Too Cheap Here

Broadcom Inc (AVGO), the semiconductor maker, reported strong revenue and free cash flow results for its fiscal Q3 on Sept. 3. Moreover, management gave robust guidance for the next quarter. This means that AVGO stock is likely deeply undervalued today.

AVGO stock is at $137.00 as of the close on Friday, Sept 6, having fallen over 10% after the results came out. This is still over its six-month low of $120.45 on April 19. So, if this downward trend continues, the stock might have further to fall to test that low again.

Nevertheless, given how strong the company’s free cash flow (FCF) and FCF margins came in during this fiscal quarter, AVGO stock looks too cheap. Based on my analysis it could easily be worth substantially more, up to $191.80 per share, or 40% more, and a minimum price target of 20.6% higher at $165.22 per share.

Strong Free Cash Flow (FCF) Results

Broadcom’s revenue hit $13.07 billion for the quarter ended Aug. 4. That was higher than analysts’ expectations by over $108 million, according to Seeking Alpha. Moreover, the company generated a record free cash flow (FCF) of $4.791 billion. That exceeds last year’s Q3 FCF of $4.597 billion, a gain of $194 million or +4.2%.

Moreover, its FCF margin was strong at 36.65% (i.e. $4.791 billion/$13.072 billion in revenue). This was higher than last quarter’s $4.448 billion in unadjusted FCF, which was 36% of revenue. 

However, last year its FCF margin was higher at 51.8%, given that its revenue was much lower (see table above). Nevertheless, making an FCF margin of almost 37% is still a very good result, albeit lower than last year. This also seems to be a sustainable level for Broadcom and could drive its value higher.

For example, management reiterated its guidance that revenue this fiscal year ending Oct. 31, 2024, will exceed $51.5 billion. Analysts forecast that revenue next year will reach $60.34 billion. As a result, using a 37% FCF margin metric, results in a free cash flow (FCF) estimate of $22.3 billion in fiscal 2025 (i.e., ending Oct. 2025).

Target Price Estimate

One way to value the stock is to use an FCF yield metric. For example, in the last 12 months (LTM) Broadcom has generated $18.655 billion in FCF, according to Seeking Alpha. That represents…