Artificial intelligence (AI) stocks are among the hottest names on Wall Street. But did you know that that much of these shares also have significant share buyback programs?
Today, let’s take a look at three such stocks: Meta Platforms (NASDAQ: META), Microsoft (NASDAQ: MSFT)And Nvidia (NASDAQ: NVDA).
Meta’s strong free cash flow is fueling the large-scale share buyback program.
Jake Lerch (Meta Platforms): My choice is Meta platformsthanks to its $50 billion share buyback program and fantastic free cash flow.
Why do I link share buybacks to free cash flow? Good, If share buyback programs were airplanes, free cash flow would be the fuel. Just to put downA share buyback plan would fail if there were insufficient free cash flow. That’s because Companies use free cash flow to finance their share buyback plans.
Fortunately, Meta is flush with cash gains. Over the past 12 months, the company reported $49 billion in free cash flow, or $18.83 per share. The past In five years, Meta has increased its free cash flow by 154%.
Meta has achieved this incredible cash flow thanks to its asset-light business model. The company’s average operating margin over that five year period is an outstanding 35% — outpacing other Internet giants such as Alphabet (27%) and Netflix (20%).
What else is thereAs the digital advertising market continues to grow, Meta’s revenue will — And then its free cash flow — should expandat. Analysts expect Meta’s revenue to rise to $165 billion in 2025, up about 14% from this year.
In turn, the company’s cash position should grow even further biggerThe value is $58 billion, although the company also has about $38 billion in debt. Nevertheless, Meta has more than enough cash winnings cover its new dividend and share buyback program.
The dividend, which was introduced this year year and first paid out in May, cost the company about $2.5 billion this year. Total costs should rise to about $10 billion a year. That leaves Meta with enough cash to keep buying back shares.
Shareholders have 60 billion reasons to like this share buyback
Will Healy (Microsoft): Software giant Microsoft has long stood out for its Windows OS and Azure cloud platform. As the world’s second-largest publicly traded company, it’s used to doing big things, and it plans to do the same with its cash reserves.
Normally, the 10% dividend hike alone might be such a move. However, that adds less than $2.2 billion to its dividend cost. Perhaps more importantly, it has also approved a share buyback program worth up to $60 billion!
While that sounds like a huge amount, investors need to put it into perspective. First, it’s a multi-year plan, and Microsoft can pull out at any time. The company hasn’t guaranteed it will spend the full amount on share buybacks.
Also, the number of outstanding shares stands at just over 7.4 billion. Even if it were to spend its entire $60 billion allocation on share buybacks at the current stock price, that would remove just under 138 million shares from the market, less than 1.9% of the shares currently available.
Still, that likely tells investors how Microsoft will deploy much of its liquidity, which stands at a staggering $75.5 billion. With that money, it can easily afford share buybacks, $24 billion in annual dividend payments and the cost of servicing its $45 billion in total debt.
Another factor that will help fund the buybacks is the estimated $74 billion Microsoft generated in free cash flow for fiscal 2024 (ended June 30). Thanks to the popularity of Azure and the funding of privately held OpenAI, Microsoft has access to some of the latest technologies in AI.
As more of its customers look to leverage AI, Microsoft stock should be in a virtuous circle. Not only will free cash flow likely increase, but it will also help fund the share buybacks and, by extension, the price appreciation that will continue to draw more investors into Microsoft stock.
An extensive share buyback program could be a foretaste of what’s to come.
Justin Pope (Nvidia): The arrival of AI on Wall Street last year has transformed Nvidia into one of the largest companies in the world, going from less than $30 billion in annual revenue to an estimated $125 billion in Nvidia’s fiscal year ending in January. Companies are investing heavily to build out the computing power to support AI applications, and the trend is likely to continue as Nvidia prepares to roll out Blackwell, its next-generation AI chip line.
Nvidia is highly profitable, converting about half of its revenue into free cash flow. That means the company could end its fiscal year with a profit of more than $60 billion in cash. Management has wasted no time putting that money to work; the company announced a $50 billion share buyback program in late August with its second-quarter earnings. Stock repurchases, or buybacks, reduce the number of shares outstanding, which boosts earnings per share and other per-share financials. It’s a way for a company to support its stock price while sharing its profits with investors.
Currently, Nvidia is down more than 15% from its highs and is trading at a forward price-to-earnings ratio of 41, based on analyst estimates for this year. Analysts believe Nvidia can grow earnings by more than 40% annually for the next three to five years, so Nvidia appears attractively valued for its expected growth.
That’s a great situation for a company to consider buying back shares. Buybacks create more value for shareholders if the stock’s valuation makes sense. The lower the price, the more shares can afford the buyback, and the higher the profits (and the stock price) go. Nvidia’s AI success gets all the attention, but don’t underestimate the role buybacks could play in Nvidia’s investment returns in the years to come.
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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, a former chief marketer and spokeswoman for Facebook and sister of Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. Jake Lerch has positions in Alphabet and Nvidia. Justin Pope has no position in any of the stocks mentioned. Will Healy has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet, Meta Platforms, Microsoft, Netflix and Nvidia. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.
3 Artificial Intelligence (AI) Stocks That Are Buying Back Their Own Shares en Masse was originally published by The Motley Fool
