Signs of Strength in Free Cash Flow
The semiconductor giant Broadcom Inc (AVGO) recently unveiled robust fiscal Q3 results, showcasing impressive revenue and free cash flow figures. The company’s management further bolstered investor confidence by providing optimistic guidance for the upcoming quarter. Despite a slight dip following the earnings report, with AVGO stock currently priced at $137.00, the company remains well above its six-month low of $120.45 from April 19. As such, given its resounding free cash flow (FCF) metrics for this fiscal quarter, Broadcom’s stock appears to be trading at a bargain.
Fiscal Health and Margins
Broadcom reported revenue of $13.07 billion for the quarter ending Aug. 4, surpassing analyst estimates by over $108 million. Notably, the company achieved a record FCF of $4.791 billion, exhibiting a 4.2% increase from the previous year’s Q3 FCF figure. Despite a slightly lower FCF margin compared to last year, standing at 36.65% for the current quarter, Broadcom’s strong financial performance underscores its stability and potential for growth.
Looking ahead, management’s revenue guidance exceeding $51.5 billion for the fiscal year ending Oct. 31, 2024, indicates a positive trajectory. Analysts predict a revenue surge to $60.34 billion in the subsequent year. Leveraging a 37% FCF margin metric, Broadcom is anticipated to generate $22.3 billion in FCF for fiscal 2025.
Estimating Target Price
Utilizing an FCF yield approach, Broadcom’s current market cap of $637.7 billion suggests a 2.92% FCF yield based on the last 12 months. As the company’s FCF strengthens, this yield is expected to improve to 2.50%. Projecting a 2025 FCF of $22.3 billion at a 2.5% yield would imply a market value of $892 billion, representing a 40% increase from its current valuation.
Even with a conservative 2.90% FCF yield estimation, Broadcom’s market cap would reach $769 billion, indicating a 20.6% upside potential from its current market cap. Consequently, the stock’s minimum price target stands at $165.22, underscoring an undervalued status.
Analysts’ Optimism
Market analysts share an optimistic outlook on AVGO stock, with average price targets exceeding its current value. Barchart and Yahoo! Finance reports indicate mean price targets ranging between $170.65 and $194.48 per share, notably higher than the current price of $137.00. Recent adjustments to price targets by top analysts, such as Joseph Moore and Toshiya Hari of Morgan Stanley and Goldman Sachs respectively, further affirm the optimistic sentiment surrounding Broadcom’s stock.
In conclusion, Broadcom’s undervaluation is substantiated by its robust financial performance, management’s positive outlook, and analyst projections. The company’s solid fundamentals and growth potential present a compelling investment opportunity for discerning investors.
More Stock Market News from Barchart