Is AVGO Stock Poised for a Rebound After Broadcom's Strong Q3 Results?
Broadcom Inc. (AVGO) earned an impressive 67.9% operating income margin in Q3, and its free cash flow (FCF) margin exceeded 46%. Given analysts' revenue forecasts for next year, its FCF could soar by 63%. AVGO stock could be worth 63% more at $639 per share.
But investors in AVGO stock have been unimpressed since the Q3 earnings release on Sept. 2. AVGO closed at $357.16 on Sept. 3. Moreover, it's well below a recent pre-earnings release peak of $427.76 on Aug. 7.
Was this a typical “buy on the rumor, sell on the news” drop, - except that the expected drop was ahead of the news?
Either way, Broadcom's fundamentals are extremely strong. As a result, AVGO stock is highly likely to be due for a significant rebound. Let's look at that.
Strong Free Cash Flow (FCF) Generation
In short, demand for Broadcom's semiconductor chips is surging. Revenue in Q3 was up 86% YoY to $29.59 billion, and up 33.36% from Q2's $22.187 billion.
Moreover, management projected $34.8 billion in revenue for Q4, up 16.38% QoQ. So, there is still strong demand for its chips.
More importantly, Broadcom is a virtual cash cow. It produced non-GAAP operating income of $20.1 billion in Q3. That represented 67.9% of revenue, higher than its prior guidance of 67%, and better than the 67.3% margin in Q2.
That's the kind of margin most companies hope to make in gross margin. Management projected a 66% margin for Q4.
More to the point, as a cash cow, Broadcom generated $13.665 billion in Q3, representing 46.18% of revenue. Over the past year, it has generated $39.403 billion, or 44.22% of revenue, according to Stock Analysis.
That implies that Broadcom could generate an astounding amount of FCF next year. This is why AVGO could be poised for a rebound.
Higher Projected FCF and Price Targets
Revenue is forecast to soar 63.5% to $173.15 billion next year (ending Oct. 2027), up from $105.91 billion forecast for Oct. 2026. So, if Broadcom generates a 44% FCF margin, by next year it could reach $76.2 billion.
That's 93% higher than the $39.4 billion in FCF over the last year and 62.8% over the $46.8 billion forecast for the year ending Oct. 2026 using the Q3 FCF margin.
Since AVGO stock has a market capitalization of $1.7 trillion, its trailing 12-month (TTM) FCF yield is 2.31%. Applying that to the 2027 forecast, the fair market value (FMV) is:
$76.2b / 0.023 = $3.313 trillion FMV
In other words, the stock's FMV is 94.8% higher than today's market cap. But, just to be conservative, let's use a 2.75% FCF margin (i.e., $46.8b 2026 FCF est./ $1,700 b):
$76.2b / 0.0275 = $2.771 billion FMV, +$1 billion higher or 63% upside
That implies AVGO's price target (PT) is 63% higher at $582 per share (i.e., 1.63 x $357.16 closing price on Sept. 2).
Other analysts agree. Yahoo! Finance reports the average analyst PT is $525.97, or 46.9% higher. Similarly, Barchart's mean survey PT is $517.31, and AnaChart's is $497.25.
What if AVGO doesn't rebound this much, or not at all, or not for a while? One play is to sell out-of-the-money (OTM) puts.
Shorting Cash-Secured Puts in AVGO
This play allows investors to earn income while setting a lower potential buy-in point. For example, the Oct. 9, 2026, expiry option chain shows that the $330.00 strike price put option has a midpoint premium of $5.33 per put contract.
That means an investor who secures $33,000 in cash with their brokerage firm can earn $533 in income by entering an order to “Sell to Open” 1 put at $330.
The secured cash acts as collateral to buy 100 shares should AVGO drop 7% to $330 on or before Oct. 9.
This effectively provides a 1.615% one-month yield (i.e., $533/$33,000). Moreover, the delta is -0.2180, implying almost an 80% probability of profit.
This effectively means that the breakeven buy-in point is $324.67 ($330.00-$5.33), or 9% lower than yesterday's close. That's a very attractive potential buy-in price.
The bottom line is that, even if AVGO doesn't rebound as expected, this is one way a patient investor can make money on Broadcom's expected stellar performance over the next year.
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.