Nvidia Shines After Joining the Dow Jones Industrial Average

The Dow Jones Industrial Average (DJINDICES: ^DJI) is a price-weighted index that tracks 30 U.S. companies. While there’s no strict process for selection, the index committee typically favors stocks that exhibit three main traits: a strong reputation, consistent growth, and significant investor interest.

On Nov. 8, semiconductor giant Nvidia (NASDAQ: NVDA) made history by joining the Dow Jones Industrial Average. At the same time, Sherwin-Williams was inducted, while chipmaker Intel and specialty chemicals leader Dow exited the index.

Although joining this prestigious index is seen as a badge of honor, it does not influence core business metrics like revenue and earnings. Generally, stocks added to the Dow have shown positive returns in their first year. This raises an interesting question for Nvidia’s investors: what might this mean for them?

Past Trends Suggest a 12% Potential Growth for Nvidia’s Stock

The Dow Jones was first launched in 1896, and its makeup has evolved slowly over time. Aside from the recent additions of Nvidia and Sherwin-Williams, the last significant changes occurred four years ago when Amgen, Honeywell, Salesforce, and RTX (formerly Raytheon Technologies) were included in 2020.

Excluding new entries from this year, only 14 companies have joined the Dow in the past 15 years. In the 12 months following their inclusion, these stocks generated a median return of about 9%. Using this historical data, we can make educated predictions for Nvidia’s upcoming performance.

When Nvidia’s stock opened on Nov. 8, it was priced around $149 per share. If it follows the historical median return pattern, it might reach about $162 per share by November 2025—indicating a potential 12% gain from its current value of $145.

Interestingly, while the last 14 companies had a median return of 9%, the S&P 500 (SNPINDEX: ^GSPC) recorded a median return of 17% during the same timeframe. This suggests that many Dow stocks have lagged behind the broader market in their first year.

However, it’s crucial to note that past performance doesn’t determine Nvidia’s future. The success of its stock over the next year will depend primarily on its financial results and market perception.

Image source: Getty Images.

Nvidia’s Dominance in AI and Computing Technologies

Nvidia has established itself as a leader in AI, with its graphics processing units (GPUs) being essential for tasks such as training machine learning models and executing AI applications. Analysts from Forrester Research have even stated, “Without Nvidia’s GPUs, modern AI wouldn’t be possible.”

In its recent third-quarter earnings report, Nvidia exceeded expectations significantly, reporting a 94% increase in revenue to $35 billion and a 103% rise in non-GAAP earnings to $0.81 per diluted share. Remarkably, Nvidia’s earnings growth has been in the triple digits for six consecutive quarters. Although such growth rates are hard to maintain indefinitely, investor optimism remains robust.

During the earnings call, CFO Colette Kress emphasized overwhelming demand for their Hopper GPUs, noting that H200 sales have ramped up faster than any product in Nvidia’s history. Additionally, the next-generation Blackwell GPU is now in full production, with Kress observing “staggering” demand. Compared to Hopper chips, Blackwell GPUs can execute AI training tasks up to four times quicker and AI inference tasks up to 30 times faster.

Kress also pointed out the significant uptake of Nvidia AI Enterprise, which assists businesses in developing and deploying various AI applications, from recommendation systems to customer service solutions. She confidently stated that full-year revenue from this software would more than double this year, with the run rate for software and services expected to exceed $2 billion.

Understanding these products reveals Nvidia’s strategic advantage in monetizing AI across both hardware and software. Blayne Curtis from Jefferies highlighted this advantage: “Nvidia controls both the hardware and software ecosystems, which should drive continued growth,” he noted in a client update.

Looking forward, Wall Street anticipates Nvidia’s adjusted earnings to grow at a remarkable 38% annually through fiscal 2027, which concludes in January 2027. This outlook makes its current valuation of 56 times adjusted earnings seem justified. Nevertheless, Nvidia faces high expectations, and any failure to meet these could lead to substantial stock losses.

Despite this, investors willing to weather volatility might consider acquiring Nvidia shares now, knowing that newly added stocks to the Dow have historically underperformed compared to the S&P 500 in their first year.

Seize the Moment for Potentially High Returns

Have you ever felt like opportunities for investing in successful stocks have slipped through your fingers? It’s time to take notice.

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• Nvidia: if you invested $1,000 when we doubled down in 2009, you’d have $380,291!*
• Apple: if you invested $1,000 when we doubled down in 2008, you’d have $43,278!*
• Netflix: if you invested $1,000 when we doubled down in 2004, you’d have $484,003!*

At present, we are providing “Double Down” alerts for three outstanding companies, and the next opportunity may not come around soon.

See 3 “Double Down” stocks »

*Stock Advisor returns as of November 18, 2024

John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Trevor Jennewine has positions in Amazon and Nvidia. The Motley Fool has positions in and recommends Amazon, Intel, Jefferies Financial Group, Nvidia, and Salesforce. The Motley Fool recommends Amgen, RTX, and Sherwin-Williams and recommends the following options: short November 2024 $24 calls on Intel. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.