Broadcom Inc. (AVGO) continues to present itself as an undervalued investment opportunity, particularly when assessing its free cash flow (FCF) and associated FCF margins.
Based on these metrics, AVGO’s stock may have a potential value increase of over 22%, reaching $1,626 per share. This estimation arises from projecting next year’s FCF utilizing its existing FCF margins and applying a 3% FCF yield metric.
Discussed in a previous Barchart article on March 31 titled “Broadcom’s Free Cash Flow Could Value AVGO Stock 21% Higher – Good for Short-Put Investors,” AVGO’s stock stood at $1,325.41. As of Friday, May 10, it closed at $1,332.80.
In the mentioned article, it was asserted that AVGO’s value should be at least $1,607.72 per share. Additionally, it recommended shorting the $1,300 strike price put option expiring on April 19.
Despite AVGO closing at $1,204.71, marking a recent low, investors who shorted puts at $1,300 would have eventually gained a 4.45% profit.
This strategy underscores the efficacy of utilizing short put plays to engage with undervalued stocks like Broadcom. AVGO’s robust free cash flow and margins further support this narrative.
A semiconductor design company primarily focusing on artificial intelligence (AI) applications, Broadcom showcased a substantial revenue increase last quarter, reaching $11.96 billion, a 34% year-over-year rise, with free cash flow (FCF) soaring to $4.693 billion, a 19.2% increase.
With FCF margins reaching 39.2% for the quarter and 45.3% over the trailing 12 months, AVGO appears capable of maintaining approximately 40% FCF margins moving forward.
Utilizing this margin, analysts project that next year’s revenue could hit $57.67 billion, resulting in an FCF forecast of $22.6 billion.
Assuming a 3.0% FCF yield metric, the market value could surge to $753.3 billion, equivalent to a 22% increase from its current market capitalization of $617.65 billion.
Similarly, Yahoo! Finance and AnaChart analysts project higher prices for AVGO, strengthening the case for investors to engage in short out-of-the-money puts to set buy-in targets and generate additional income.
For instance, examining the May 31 expiration period, the $1,290 strike price presents a premium of $22.30 on the bid side, potentially yielding around 1.73%. This strategy ensures a breakeven buy-in cost of $1,267.70, over 4.1% below the May 10 price, offering considerable downside protection.
Ultimately, investors can capitalize on potential price increases while earning extra income, making AVGO an attractive investment avenue, particularly when combining short put plays with existing share holdings.
