Nvidia Joins the Dow: Is Its Growth Sustainable or Time to Look Elsewhere?

Nvidia (NASDAQ: NVDA) has recently replaced Intel in the Dow Jones Industrial Average (DJINDICES: ^DJI), adding more technology and semiconductor representation to this prestigious index. With Nvidia’s stock skyrocketing by 910% since early last year, some investors may question whether this uptick has peaked, prompting a shift to alternative investments.

Below are some insights on why Nvidia may still be a compelling growth stock while exploring the advantages of investing in the Dow for certain investors.

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Why Nvidia Remains a Strong Buy

Nvidia has reshaped its business from primarily gaming and graphics to pioneering innovative products that fuel advanced artificial intelligence (AI) applications. Investors might want to buy Nvidia out of confidence that it will maintain its AI leadership and that its clients will profit from AI, thereby increasing demand for Nvidia’s offerings.

Despite some fears of a slowdown in the AI rush, Nvidia consistently reports impressive sales and earnings growth. Over the past year alone, its stock price surged by 130.7%, leading to a 112.6% rise in earnings. This growth keeps its valuation within a reasonable range. Analysts forecast that earnings per share (EPS) will rise to $4.37 in fiscal 2026 from $2.95 in fiscal 2025, reflecting a solid 48% growth in just a year.

Nvidia’s ability to grow its earnings at a sustainable rate can justify its current stock valuation, allowing it to potentially outpace the Dow over time. For instance, if Nvidia can maintain a 25% average growth in earnings yearly over the next five years, and if its stock price rises by 20% annually, it may outperform the Dow and the S&P 500, which has typically averaged about 10% yearly growth overall and 13.5% in the past ten years. This growth could lower its price-to-earnings (P/E) ratio from 56.1 to 45.8 by the end of this period, demonstrating the power of earnings growth in the stock market.

Growth doesn’t require Nvidia to double its earnings every year. However, a significant decline in growth could cause its stock to appear overvalued.

Consider a Dow ETF as an Alternative

Investors might opt to purchase a Dow exchange-traded fund (ETF), like the SPDR Dow Jones Industrial Average ETF Trust (NYSEMKT: DIA), rather than individual stocks. This ETF features a low expense ratio of 0.16% and boasts $37.7 billion in net assets. Given the Dow’s price-weighted nature, Nvidia only constitutes about 2.1% of the index, meaning that a $1,000 investment in the ETF would allocate approximately $21 to Nvidia and $979 to the other 29 companies in the index.

For investors seeking value and income, the Dow presents a solid choice. The SPDR Dow Jones Industrial Average ETF Trust features a 26.2 P/E ratio and a yield of 1.7%. These figures contrast with the more expensive 29.8 P/E ratio and 1.3% yield from the Vanguard S&P 500 ETF or the 41.2 P/E ratio and 0.6% yield from the Invesco QQQ Trust, which tracks the largest stocks in the Nasdaq-100 (excluding financial stocks).

Evaluating Your Investment in Nvidia

Nvidia’s rapid ascent from a well-known tech stock to being the world’s most valuable company has notably affected indices like the S&P 500, Nasdaq Composite, and now the Dow Jones Industrial Average. This situation may please Nvidia enthusiasts, while causing concern for those worried about its current valuation.

Since Nvidia comprises only a small fraction of the Dow, investing in a Dow ETF allows exposure to top companies without a heavy reliance on Nvidia itself. Other ETFs worth considering for value and income include the Vanguard Value ETF, the Vanguard Mega Cap Value ETF, and the Vanguard High Dividend Yield ETF.

Nvidia’s unique position in the market, marked by its rapid growth and earnings, stands out when compared to past high-potential companies. Historically, such firms often relied on expected revenue surges to fuel high stock prices. Nvidia, though, is proving its worth through exceptional earnings growth.

The company achieved a remarkable net income of $19.3 billion in its most recent quarter. For context, Microsoft reported $24.7 billion in net income during the same period.

Nvidia ranks among the most profitable firms globally, growing faster than its mega-cap tech counterparts. As long as this trend continues, it is likely to keep rewarding its investors, although it’s essential to consider your risk tolerance before buying.

A Potential Second Chance at a Lucrative Investment

Do you ever feel you missed out on investing in the most successful stocks? This might be your chance to act.

Occasionally, expert analysts recommend a “Double Down” stock, suggesting a promising opportunity for gains. If you’re worried about missing your chance to invest, now may be the right time to act. Consider these results:

• Nvidia: Invest $1,000 in 2009, and you’d have $350,915!
• Apple: $1,000 invested in 2008 would be worth $44,492!
• Netflix: If you put in $1,000 in 2004, it would have grown to $473,142!

Currently, “Double Down” alerts are being issued for three exceptional companies, and opportunities like these may not arise again soon.

See 3 “Double Down” stocks »

*Stock Advisor returns as of November 25, 2024

Daniel Foelber has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Intel, Microsoft, Nvidia, Vanguard Index Funds-Vanguard Value ETF, Vanguard S&P 500 ETF, and Vanguard Whitehall Funds-Vanguard High Dividend Yield ETF. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft, short February 2025 $27 calls on Intel, and short January 2026 $405 calls on Microsoft. 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.