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
- Consistent earnings power.
- Good returns on equity with limited or no debt.
- Management in place.
- 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:
Source: Capital IQ, a division of Standard & Poor's. Free cash flow is adjusted based on author’s calculations.
NVIDIA has had pretty wild fluctuations in its earnings and free cash flow over the past few years. 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 actually is.
Since competitive strength is a comparison between peers, and various industries have different levels of profitability and require different levels of debt, it helps to use an industry context.
Return on Equity (LTM)
Return on Equity (5-Year Average)
Source: Capital IQ, a division of Standard & Poor's.
NVIDIA has a moderate return on equity. It employs almost no debt.
Jen-Hsun Huang and Chris Malachowsky have led the company since they co-founded it in 1993.
Graphics technology and semiconductors are fields that are highly vulnerable to competing technological innovation. It's likely that Buffett would have some qualms.
The Foolish conclusion
Whether or not Buffett would buy shares of NVIDIA, we've learned that, while it has tenured management, it doesn't currently exhibit some of the other characteristics of a quintessential Buffett investment: consistent earnings and a straightforward business.
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Ilan Moscovitz doesn't own shares of any company mentioned. You can follow him on Twitter @TMFDada. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.