Broadcom Inc. (AVGO) produced strong free cash flow and higher FCF margins for its fiscal Q2 ending May 4. FCF was almost 43% of revenue, its highest margin in the last year. Using a FCF yield valuation metric, ABGO stock is worth $328 per share, +35% more. This article will show how that works out.

AVGO is at $243.40 in midday trading on Monday, June 9. That is off its recent six-month high of $261.08 on June 4.

Based on analysts' estimates for the semiconductor design company's revenue and using our FCF forecast, it could generate almost $29 billion in free cash over the next 12 months (NTM). That could drive AVGO stock considerably higher.

Strong Revenue and FCF

Broadcom's revenue rose 20% Y/Y and up less than 1% Q/Q. This was driven by strong demand for data center virtualization software products and cloud products. Moreover, free cash flow (FCF) skyrocketed to over $6.4 billion, its highest quarterly amount ever.

That means that 42.7% of its $15 billion in fiscal Q2 revenue went straight into its bank account with no cash expenses or requirements. The table below shows that this is its highest margin over the last year:

For the last two quarters, the average FCF margin was slightly lower at 41.5% of sales. This implies it is on a run-rate for $24.8 billion FCF (i.e., $12.4b x 2) for the year.

However, it could be higher over the next 12 months (NTM).

For example, analysts now project that revenue for the year ending Oct. 2025 will be $62.72 billion and $74.67 billion for the next year. That implies its NTM run rate is $68.7 billion. 

So, if we assume Broadcom will average 42% of sales as FCF:

  $68.7b NTM sales x 42% = $28.85 billion NTM FCF

In other words, forecasted FCF will be over $4 billion higher than its present run rate of $24.8 billion, i.e., +16% higher. That implies Broadcom's valuation could rise significantly higher.

Target Price for AVGO Stock

For example, using a 1.75% FCF yield valuation method, Broadcom's market cap could rise to $1.65 trillion. (This method assumes the market would give AVGO a 1.75% dividend yield, if it were to pay out 100% of FCF as a dividend.):

  $28.85b FCF / 0.0175 = $1,649 billion = $1.65 trillion

(Note that this is the same as multiplying FCF by 57x, i.e., 1/0.0175 = 57.1).

This valuation is +43.5% higher than Broadcom's present $1.148 trillion market cap, according to Yahoo! Finance.

Even using a slightly lower multiple, say 50x (i.e., equivalent to a 2.0% FCF yield), AVGO is still undervalued:

  $28.85b FCF x 50 = $1,442.5 billion = $1.44 trillion

That is +25.6% higher than today's market cap of $1,148 billion.

In other words, AVGO is worth between 25.6% and 43.5% more than today's price, or:

  Target Price:  1.256 x $243.40 = $305.71

                        1.435 x $243.40 = $349.28

On average, then, we can project a price of about $327.50, or 34.5% more.

One way to play this, setting a lower buy-in price, is to sell short out-of-the-money (OTM) puts.

Shorting OTM Puts

Look at the July 11, 2025, options expiry period, 32 days to expiry (DTE). The $230 put strike price, which is over 5% below today's trading price (i.e., “out-of-the-money”), has a midpoint premium of $5.40 per put contract.

That means an investor who enters an order to “Sell to Open” 1 put at this strike makes an immediate yield of 2.35% (i.e., $5.40/$230 = 0.02349).

That is a great way to get paid while waiting to see if AVGO stock falls 5 %+ to this lower buy-in strike price. Note that the delta ratio is low at -0.286, implying less than a 27% chance, based on past volatility, that AVGO will fall to $230.

Moreover, even if it does, the investor who shorts these puts has a lower breakeven point:

  $230 - $5.40 = $224.60

That is 7.7% lower than today's price. That provides good downside protection for the short investor.

The bottom line is that AVGO looks undervalued. It has risen recently, and shorting OTM puts allows investors to set a lower buy-in point while getting paid.

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.