Learn which AI stocks are buyback stars.
Artificial intelligence (AI) stocks are some of the hottest names on Wall Street. But did you know that many of these stocks also boast significant share buyback programs?
Today, let’s examine three such stocks: Meta Platforms (META 0.40%), Microsoft (MSFT -0.78%), and Nvidia (NVDA -1.59%).
Image source: Getty Images.
Meta’s strong free cash flow fuels its massive share buyback program.
Jake Lerch (Meta Platforms): My choice is Meta Platforms, thanks to its $50 billion share buyback program and fantastic free cash flow.
Why do I link the share buyback and free cash flow? Well, if share buyback programs were airplanes, free cash flow would be their fuel. Simply put, a buyback plan would crash and burn without ample free cash flow. That’s because companies use free cash flow to fund their buyback plans.
Thankfully, Meta is awash in cash profits. Over the last 12 months, the company has reported $49 billion in free cash flow, or $18.83/share. Over the last five years, Meta has increased its free cash flow by 154%.
META Free Cash Flow data by YCharts
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% — topping other internet giants like Alphabet (27%) and Netflix (20%).
What’s more, as the digital ad market continues to expand, Meta’s revenue — and subsequently its free cash flow — should expand, too. Analysts expect Meta’s revenue to rise to $165 billion in 2025, up roughly 14% from this year.
In turn, the company’s cash pile should grow even larger. It stands at $58 billion, although the company also has about $38 billion in debt. Nevertheless, Meta has more than enough cash profits to cover its new dividend and share buyback program.
The dividend, introduced this year and first paid out in May, has cost the company about $2.5 billion this year. The total cost should rise to roughly $10 billion per year. That leaves Meta plenty of cash to keep buying back stock.
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 is used to going big and also plans to do so with its cash reserves.
Typically, its 10% dividend increase might constitute such a move by itself. However, that adds less than $2.2 billion to its dividend costs. What is likely more significant is it also approved a share repurchase program valued at up to $60 billion!
While that sounds massive, investors should put that into perspective. For one, it’s a multi-year plan and Microsoft could revoke the plan at any time. The company has not guaranteed that it will spend the entire amount on buying back shares.
Also, the number of outstanding shares stands at just over 7.4 billion. Even if it spends the entire $60 billion allotment on share repurchases at today’s share price, that will remove just under 138 million shares from the market, less than 1.9% of the shares currently available.
Still, this likely tells investors how Microsoft will deploy much of its liquidity, which stands at a staggering $75.5 billion. With that cash, it can easily afford share buybacks, $24 billion in annual dividend expenses, and the costs of servicing its $45 billion in total debt.
Another factor that will help bankroll the repurchases is the approximate $74 billion Microsoft generated in free cash flow for fiscal 2024 (ended June 30). Thanks to the popularity of Azure and its funding of privately held OpenAI, Microsoft has access to some of the latest technology in the AI field.
As more of its clients seek to leverage AI, Microsoft stock should find itself in a virtuous cycle. Not only will its free cash flow probably rise, but it will also help fund the share buybacks and, by extension, the price growth that will continue to draw more investors to Microsoft stock.
A ramped-up buyback program could be a taste of what’s to come.
Justin Pope (Nvidia): AI’s arrival on Wall Street last year has turned Nvidia into one of the world’s largest companies. This business went from less than $30 billion in annual revenue to an estimated $125 billion in Nvidia’s fiscal year ending this January. Companies are investing heavily to build the computing capacity to support AI applications, and the trend is poised to continue, with Nvidia getting set to roll out Blackwell, its next-generation AI chip line.
Nvidia is highly profitable, converting roughly half its revenue into free cash flow. That means the company could end its fiscal year generating over $60 billion in cash profits. Management hasn’t wasted any time putting that cash to work; the company announced a $50 billion share repurchase program at the end of August with Q2 earnings. Share repurchases, or buybacks, lower the amount of outstanding shares, boosting 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 more than 15% off its high and trading at a forward P/E of 41 using analyst earnings estimates for this year. Analysts believe Nvidia could grow earnings by over 40% annually for the next three to five years, so Nvidia appears attractively valued for its expected growth.
That’s an excellent situation for a company to consider repurchasing stock. Buybacks create more value for shareholders when the stock’s valuation makes sense. The lower the price, the more shares the buybacks can afford, and the higher earnings (and the stock price) go. Nvidia’s AI success gets all the hype, but don’t underestimate the role buybacks could play in Nvidia’s investment returns over the coming years.
Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to 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.
