Here's Why NVIDIA (NVDA) Is a Defensive Stock According to the Graham Test

NVIDIA meets some but not all of Benjamin Graham's requirements for a defensive stock. The Semiconductors company does not offer a large enough margin of safety for cautious investors, but it does have many qualities that may interest more enterprising investors.

NVIDIA Is Probably Overvalued

Graham devised the below equation to give investors a quick way of determining whether a stock is trading at a fair multiple of its earnings and its assets:

√(22.5 * 6 year average earnings per share (1.88) * 6 year average book value per share (11.049) = $18.58

After an impressive 242.0% performance over the 12 months, NVIDIA is now trading well over its fair value because its Graham number is 2215.5% above today's share price of $430.22. Even though the stock does not trade at an attractive multiple, it might still meet some of the other criteria for quality stocks that Graham listed in Chapter 14 of The Intelligent Investor.

Impressive Revenues, Consistent Profitability, and a Growing Dividend Imply Value

NVIDIA’s average sales revenue over the last 6 years has been $20.61 Billion, so by Graham’s standards the stock has sufficient revenues to make it worthy of investment. When published in 1972, Graham’s threshold was $100 million in average sales, which would be the equivalent of around a half million dollars today.

Ben Graham believed that a margin of safety could be obtained by investing only in companies with consistently positive retained earnings. Retained earnings represent the cumulative net earnings or (deficit) left to equity holders after dividends have been paid out. NVIDIA had positive retained earnings from 2009 to 2023 with an average of $7.44 Billion over this period.

Ben Graham would also require a cumulative growth of Earnings Per Share of at least 30% over the last ten years.To determine NVIDIA's EPS growth over time, we will average out its EPS for 2008, 2009, and 2010, which were $1.31, $0.19, and $0.15 respectively. This gives us an average of $0.55 for the period of 2008 to 2010. Next, we compare this value with the average EPS reported in 2021, 2022, and 2023, which were $1.73, $3.85, and $1.74, for an average of $2.44. Now we see that NVIDIA's EPS growth was 343.64% during this period, which satisfies Ben Graham's requirement.

NVIDIA’s Balance Sheet Meets Graham’s Criteria

It was also essential to Graham that the company’s current assets outweigh its current liabilities, and that its long term debt be inferior to the sum of its net current assets (current assets minus total liabilities). This is the aspect of the analysis that most companies fail, yet NVIDIA passes comfortably, with an average current ratio of 3.5, and average debt to net current asset ratio of 2.4.

Conclusion

NVIDIA offers a decent combination of value, growth, and profitability. These factors imply that the investment offers a decent margin of safety — especially if the shares are bought during a sell-off.