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They generate huge amounts of free cash flow and use the most of this to reduce their share counts — to great effect on their stock prices.
Not too many people realize that both Google ( GOOG, GOOGL) and Facebook ( FB) make some of the largest stock buyers in the market. They both have massive share repurchase programs that influence their stock prices.
I chose both of these companies since they both make most of their revenue in advertising. And they both generate huge amounts of free cash flow (FCF). FCF is what pays for the huge stock buybacks at these companies.
Thinking About Free Cash Flow
Free cash flow is one of my favorite themes in analyzing stocks. It refers to the cash earnings of a company after all major expenditures, including every cash expense on the income statement, plus some other items.
Those other FCF items include major expenditures that are not on the income statement, like capital expenditures (buying furniture, capital plant equipment, or paying for software development expenses in some cases). FCF also includes changes in working capital — i.e., how much payables increase or not, or receivables increase…
