Is NVIDIA a Buffett Stock?

As the world's third-richest person and most celebrated investor, Warren Buffett attracts a lot of attention. Thousands try to glean what they can from his thinking processes and track his investments.

We can't know for sure whether Buffett is about to buy NVIDIA (NAS: NVDA) -- he hasn't specifically mentioned anything about it to me -- but we can discover whether it's the sort of stock that might interest him. Answering that question could also reveal whether it's a stock that should interest us. In this series, we do just that.

Writing in his most recent 10-K, Buffett lays out the qualities he looks for in an investment. In addition to adequate size, proven management, and a reasonable valuation, he demands:

  1. Consistent earnings power.

  2. Good returns on equity with limited or no debt.

  3. Management in place.

  4. Simple, non-techno-mumbo-jumbo businesses.

Does NVIDIA meet Buffett's standards?

1. Earnings power
Buffett is famous for betting on a sure thing. For that reason, he likes to see companies with demonstrated earnings stability.

Let's examine NVIDIA's earnings and free cash flow history:


Source: S&P Capital IQ.

NVIDIA has had pretty wild fluctuations in its earnings and free cash flow over the past few years before recovering. Of course, this is to be expected for a semiconductor company during an economic downturn.

2. Return on equity and debt
Return on equity is a great metric for measuring both management's effectiveness and the strength of a company's competitive advantage or disadvantage -- a classic Buffett consideration. When considering return on equity, it's important to make sure a company doesn't have an enormous debt burden, because that will skew your calculations and make the company look much more efficient than it is.

NVIDIA generates a fairly strong return on equity (19% over the past year, 16% on average over the past five years) while employing negligible amounts of debt.

3. Management
Jen-Hsun Huang and Chris Malachowsky have led the company since they co-founded it in 1993.

4. Business
Graphics technology and semiconductors are fields that are highly vulnerable to competing technological innovation. It's likely that Buffett would have serious qualms.

The Foolish conclusion
So is NVIDIA a Buffett stock? Probably not, because of the high-tech and rapidly changing nature of its business. But we did learn that the company exhibits some of the other quintessential characteristics of a Buffett investment: high returns on equity with limited debt and tenured management. NVIDIA has been enjoying tremendous success in recent years from the mobile revolution. If you'd like to find out about three stocks to profit from the trend, check out "3 Hidden Winners of the iPhone, iPad, and Android Revolution."

At the time thisarticle was published Ilan Moscovitzdoesn't own shares of any stock mentioned.Motley Fool newsletter serviceshave recommended buying shares of and writing puts in NVIDIA. Try any of our Foolish newsletter servicesfree for 30 days. We Fools don't all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.

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