Is NVIDIA the Perfect Stock?

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Everyone would love to find the perfect stock. But will you ever really find a stock that gives you everything you could possibly want?

One thing's for sure: If you don't look, you'll never find truly great investments. So let's first take a look at what you'd want to see from a perfect stock, and then decide if NVIDIA (Nasdaq: NVDA  ) fits the bill.

The quest for perfection
When you're looking for great stocks, you have to do your due diligence. It's not enough to rely on a single measure, because a stock that looks great based on one factor may turn out to be horrible in other ways. The best stocks, however, excel in many different areas, which all come together to make up a very attractive picture.

Some of the most basic yet important things to look for in a stock are:

  • Growth. Expanding businesses show healthy revenue growth. While past growth is no guarantee that revenue will keep rising, it's certainly a better sign than a stagnant top line.
  • Margins. Higher sales don't mean anything if a company can't turn them into profits. Strong margins ensure a company is able to turn revenue into profit.
  • Balance sheet. Debt-laden companies have banks and bondholders competing with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
  • Money-making opportunities. Companies need to be able to turn their resources into profitable business opportunities. Return on equity helps measure how well a company is finding those opportunities.
  • Valuation. You can't afford to pay too much for even the best companies. Earnings multiples are simple, but using normalized figures gives you a sense of how valuation fits into a longer-term context.
  • Dividends. Investors are demanding tangible proof of profits, and there's nothing more tangible than getting a check every three months. Companies with solid dividends and strong commitments to increasing payouts treat shareholders well.

With those factors in mind, let's take a closer look at NVIDIA.

Factor What We Want to See Actual Pass or Fail?
Growth 5-Year Annual Revenue Growth > 15% 9.5% Fail
  1-Year Revenue Growth > 12% 28.8% Pass
Margins Gross Margin > 35% 36.9% Pass
  Net Margin > 15% 5.8% Fail
Balance Sheet Debt to Equity < 50% 0.8% Pass
  Current Ratio > 1.3 3.44 Pass
Opportunities Return on Equity > 15% 8% Fail
Valuation Normalized P/E < 20 NM Fail
Dividends Current Yield > 2% 0% Fail
  5-Year Dividend Growth > 10% 0% Fail
  Total Score   4 out of 10

Source: Capital IQ, a division of Standard and Poor's. NM = not meaningful; NVIDIA had negative earnings during the period and therefore fails the test. Total score = number of passes.

NVIDIA manages to score just four points. The graphics specialist has faced some tough times recently, but a strong showing at this month's Consumer Electronics Show has bulls flexing their muscles once again.

NVIDIA's products help computers, game consoles, and smartphones deliver the stunning graphics that we've all come to expect from electronic devices. But consumers have been buying lower-priced graphics cards lately, cutting margins and threatening net income. With NVIDIA having focused mostly on the higher end in the past, rival AMD (NYSE: AMD  ) has taken away market share as consumers moved down the price scale.

One of NVIDIA's biggest focuses lately has been on its Tegra processor, which is aimed directly at the mobile device market that competitors Qualcomm (Nasdaq: QCOM  ) and Texas Instruments (NYSE: TXN  ) have found success in. Despite its slow start, Tegra is finally starting to gain traction. Reports suggest many smartphone and tablet makers have placed orders with NVIDIA, and many different manufacturers featured Tegra processors at the recent CES.

NVIDIA is also looking at new markets. At the CES, Tesla Motors (Nasdaq: TSLA  ) featured a 17-inch display powered by NVIDIA's Tegra, showing the potential of the auto market. Moreover, its plan to integrate graphics and central processors could change the structure of the semiconductor industry, threatening Intel's (Nasdaq: INTC  ) long dominance.

Of course, it's too early to tell if NVIDIA can succeed. But if it does, you can expect to see the stock look a whole lot closer to perfect in the years ahead.

Keep searching
No stock is a sure thing, but some stocks are a lot closer to perfect than others. By looking for the perfect stock, you'll go a long way toward improving your investing prowess and learning how to separate out the best investments from the rest.

Click here to add NVIDIA to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.

Fool contributor Dan Caplinger doesn't own shares of the companies mentioned in this article. NVIDIA is a Motley Fool Stock Advisor choice. The Fool owns shares of and has bought calls on Intel, which is a Motley Fool Inside Value pick. Motley Fool Options has recommended buying calls on Intel. The Fool owns shares of Q ualcomm and Texas Instruments. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool has a disclosure policy.

Read/Post Comments (4) | Recommend This Article (4)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On January 20, 2011, at 11:34 AM, jargonific wrote:

    NVDA has just fallen. What would you do today?

  • Report this Comment On January 20, 2011, at 12:01 PM, TEBuddy wrote:

    I would wait until it falls to $15, which would still be 40 times its earnings.

  • Report this Comment On January 20, 2011, at 12:09 PM, jwtrotter wrote:

    Please guys, let go of the $15 price target set by GS already!! The AVERAGE target is now almost $20 and most of the recent updates are higher than $20. This stock isn't going back down to $15 anytime soon.

  • Report this Comment On January 20, 2011, at 5:55 PM, turkeybird wrote:

    I believe that the price today is fair. The price will rise however as Tegra picks up steam and starts to pay off. Remember, Apple at one time not long ago reflected quite the same sort of ROE for several years before new ideas and thinking out of the box (Thank You Steve Jobs) took the company way beyond any bodies wildest dreams. The latest coop with ARM is just the spark that may ignite the stock. The quality is there, the business plan is in place and the train may be about to leave the station. No, NVDA is not a perfect stock - there is no such thing. But I am extremely bullish now wherein a year ago I would have been on the side line waiting to see what better investments were out there. Not that Nvda is Apple, but it is a gem!

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