As the chart below shows, the AGL Energy Limited (ASX: AGL) stock price has dropped almost 9% since the company released its FY25 half-year result less than a week ago.

In the short term, the market's reaction to the result is a reflection of how the company performed compared to expectations, rather than the numbers themselves.

Broker UBS actually thought the FY25 half-year result was "solid", with the underlying profit (EBITDA) figure of $1.07 billion beating the market's (analyst consensus) estimates by 8%.

However, UBS also noted that while AGL narrowed its guidance for FY25, it only added around 1% to the new midpoint of the guidance. The new guidance is $1.935 billion to $2.135 billion, up from previous guidance of $1.87 billion to $2.17 billion.

The broker believes this guidance reflects a weaker second half of FY25 because of lower seasonal demand and increasing customer competition.

Is AGL stock a buy, hold or sell?

UBS noted that AGL highlighted a strong electricity price outlook for FY26 to FY27, and the broker agreed with that view—there's potential for a retail electricity price increase of around 5% over the period. That could be helpful support for AGL stock.

Another headline from the AGL update was its expanded battery portfolio which, in UBS' opinion, sets out a path for earnings per share (EPS) growth improvements from FY26 onwards. AGL expects to make a final investment decision on 1.4GW of new battery capacity over the next 18 months. This will bring AGL's total committed battery capacity to around 2.4GW by the first half of FY27.

However, AGL's plans do come with a cost, and therefore, the broker increased what it's expecting the ASX energy share to spend on capital expenditure, particularly 'sustaining capex' (to between $600 million and $670 million per year). The flow-on of this is "amplifying the task AGL faces in optimising generation availability", as well as replacing the energy, capacity and free cash flow from AGL's ageing coal-fired power stations.

While UBS thinks AGL can generate "materially higher" profit than other analysts think from FY27 onwards, it only has a neutral rating on the company because the broker sees "the potential for higher shareholder returns moderated by the scale" of AGL's investment challenges.

Forecasts

In FY25, the broker predicts AGL's revenue could hit $14 billion, and net profit could reach $690 million, enabling an annual dividend per share of 51 cents. However, the net debt could climb to $2.6 billion.

In FY27, where UBS is more positive than other analysts, the broker sees $14.4 billion in revenue, $804 million of net profit, and a dividend per share of 75 cents.

UBS has a price target of $11.50 on the business, implying a possible rise of more than 7% from where the AGL stock price is today, which sounds relatively appealing.