NVIDIA CORP (NASDAQ:NVDA): A GARP Case Study in Affordable Growth

For investors looking to balance the search for high-growth companies with a careful view of price, the Growth at a Reasonable Price (GARP) method offers a useful framework. This approach seeks to find companies with strong and lasting growth, but whose shares are not priced at extreme levels. The aim is to sidestep the high speculation of some growth stocks while still gaining from better-than-average expansion. One useful tool for this method is a quantitative filter, like the "Affordable Growth" filter, which selects for stocks with high growth marks, good profit and financial strength, and a valuation mark that implies the price is connected to basics.

A clear example from this filter is NVIDIA CORP (NASDAQ:NVDA). The chipmaker, a leading player in artificial intelligence and accelerated computing, presents an interesting study in how a company can show very high growth while still, by some measures, be seen as fairly priced within its dynamic field.

A Base of Strong Profit and Strength

Before looking at growth and valuation, it is important to evaluate the company's operational and financial base. A GARP method favors companies with sound basics because high growth based on weak footing is risky. NVIDIA's base marks are very strong.

• Profitability Mark: 10/10. The company runs with top-tier efficiency. Its profit margin is 53.01%, and its return on invested capital (ROIC) of 71.56% is much higher than its cost of capital, showing it creates large value for shareholders. These measures are with the best in the semiconductor field.
• Financial Strength Mark: 9/10. NVIDIA has a very strong balance sheet. With a low debt-to-equity ratio of 0.06 and a current ratio of 4.47, the company has strong liquidity and almost no debt worries. Its Altman-Z score, a bankruptcy risk measure, is a high 69.99, indicating very strong financial safety.

This pairing of high profit and clean strength gives a stable base to support and pay for future growth, lowering the investment risk.

The Driver: High Growth Path

The central idea of the GARP method is finding solid growth, and NVIDIA's recent results have been remarkable. The company gets a top Growth Mark of 9/10.

• Past Results: Over the last year, revenue increased by 65.22%, while earnings per share (EPS) rose by 60.43%. The multi-year averages are more notable, with revenue increasing at 64.24% and EPS at 83.26% per year.
• Future Outlook: While analysts expect a slowdown from these high rates, the forward estimates stay solid. Revenue is forecast to grow at an average of 30.03% per year, with EPS growth estimated near 32.99%.

This strong growth story, powered by the wide use of AI across sectors, is the main draw for growth investors. The Affordable Growth filter specifically requires a mark above 7 here, a standard NVIDIA meets.

The Fair Price: Valuation Viewed with Other Factors

This is where the GARP method differs from only chasing growth. A stock must be growing, but not at any cost. NVIDIA's Valuation Mark of 5/10 shows a varied view, but important related factors support the "fair" view within its peer group and growth outlook.

On the surface, a Price-to-Earnings (P/E) ratio of 44.81 seems high, especially next to the wider S&P 500 average. However, two important filters are used:

• Field Comparison: Within the high-growth semiconductor field, where the average P/E is above 71, NVIDIA is actually valued lower than nearly 63% of its peers.
• Growth Adjustment: The Price/Earnings to Growth (PEG) ratio, which changes the P/E for expected growth, points to a rather low valuation. When a company is expected to grow earnings at nearly 33% per year, a higher P/E multiple can be acceptable.

Also, the more forward Price/Forward Earnings ratio of 24.0 matches the S&P 500 average and is lower than about 74% of field rivals. For a GARP investor, this implies the market, while seeing NVIDIA's lead, is not assuming current growth rates last forever, leaving possible room for gain if growth continues.

Summary and Next Steps

NVIDIA CORP shows the kind of company an Affordable Growth or GARP filter aims to find. It has the three key points of strong investment standards: high growth (Mark: 9), very good financials and profit (Marks: 9 & 10), and a valuation that, while not low in simple terms, seems fair compared to its strong growth outlook and field setting. The company's basic strength gives a safety buffer, while its growth driver offers the chance for good returns.

Investors curious about other companies that meet similar standards of solid growth, good basics, and fair valuation can use the Affordable Growth filter themselves to find more possible options. A full look at NVIDIA's basic marks is in its full basic analysis report.

Disclaimer: This article is for information only and is not financial advice, a suggestion, or an offer to buy or sell any securities. Investors should do their own study and think about their personal money situation before making any investment choices.