AVGO is undervalued; fair value $523 vs current $353 implies >48% upside in 12-18 months driven by revenue/profit expansion and full capacity.

The first of the four undervalued semiconductor stocks that I will highlight is Broadcom. Broadcom is a company that helps companies like Alphabet develop their own accelerated computing chips.

Broadcom experienced a sales boom, a real boom by all measures. Revenues are rising significantly, and profits are constantly expanding. The company remains fully booked for the rest of this year, and it looks like it will be for the rest of next year as well.

I calculated the fair value of Broadcom stock at $523.

The method I arrived at this was by estimating the amount of cash flow I believe the company will generate from today until the very distant future. In 2026, I estimate that this company will generate $50 billion in cash flow, increasing to $90 billion the following year, and then to $123 billion the year after that.

From that point onward, I anticipate a strong period of transitional growth to $144 billion, then $168 billion, and finally $197 billion by 2031.

By discounting all those cash flows to their current value, I calculated the total value of the company's operations, then divided it by the number of outstanding shares to arrive at a fair value estimate of $523.

If you are wondering what discount rate I used, I used a weighted average cost of capital methodology incorporating a capital asset pricing model (CAPM), which includes the company’s beta coefficient, risk-free rate, and weighted average cost of capital based on the capital structure, i.e., the amount of debt versus equity the company has.

Broadcom has a beta coefficient of 1.22. The risk-free rate is rising here in the United States as the 10-year bond yield climbs, and that's why I calculated Broadcom's weighted average cost of capital at 11.6%.

This is the discount rate I applied to arrive at the fair value estimate of $523.

And now, its current market price is $353 per share. Therefore, I am calculating a rise in the value of Broadcom shares of more than 48% over the next 12 to 18 months.

Given these very strong prospects, I was very excited and bought Broadcom shares for my investment portfolio earlier this year, and I am interested in buying more. If you are thinking of companies like Broadcom, Marvell, Qualcomm, Nvidia, AMD, and Apple, all of these companies rely on TSMC for at least some of their products.