Nvidia (NVDA 2.15%) Replaced Intel in the Dow Jones Industrial Average (^DJI 0.42%) Earlier this month, the historic index added more technology and semiconductor exposure.
But with Nvidia up 910% since the beginning of last year, some investors may be wondering if the rally has gone too far and that investing in other stocks might be a better option. I don’t know.
Here are some reasons why while NVIDIA may still be a growth stock worth buying, investing in the Dow may be an even better buy for some investors.
Image source: Getty Images.
Why buy Nvidia?
Nvidia’s transformation from a gaming and graphics visualization company to a company that develops cutting-edge products that power advanced artificial intelligence (AI) applications has made it the world’s most valuable company. The simplest reason to buy Nvidia is that we believe Nvidia will continue to be the leader in AI, and that Nvidia customers will be able to monetize their AI, grow their profits, and buy more Nvidia products in the future. That’s what I’m doing.
Despite concerns that the AI megatrend is slowing, Nvidia continues to deliver impeccable revenue and profit growth. Nvidia’s stock price is up 130.7% over the last year, but its valuation is still somewhat reasonable as its revenue is up 112.6%. But analysts expect growth to slow, with FY2026 earnings per share (EPS) expected to be $4.37 compared to $2.95 in FY2025 (Nvidia expects FY2026 earnings per share (EPS) to be $4.37, compared with $2.95 in FY2025. have just announced their financial results). Still, this represents a 48% increase in profits in a single year.
The easiest way for Nvidia to outperform the Dow over time is for its fundamentals to grow to its current valuation. This means continuing to grow earnings at a rate that can support the large share price gains we’ve already seen, without driving up valuations further. Here’s an example of how this might play out.
Assume that Nvidia will see an average 25% increase in revenue over the next five years due to some margin erosion due to business cycles and competition in the semiconductor industry. If the company’s stock price rises an average of 20% over that period, it will likely outperform the Dow and S&P 500. The Dow Jones Industrial Average has risen about 10% a year on average over the long term, and has recently risen an additional 13.5%. Additionally, the company’s price-to-earnings ratio (P/E) will decline from 56.1x to 45.8x. If the company maintains the same growth rate for 10 years, the P/E ratio after 10 years will be 37.3.
There’s nothing more powerful in the stock market than sustained profit growth. Nvidia doesn’t need to keep doubling its revenue every year to be a huge investment, but it also can’t afford to let its growth rate drop significantly at this point. Otherwise, the stock may start to be overvalued.
Why invest in the Dow ETF instead?
Although you could buy individual shares (or fractional shares) of all 29 other Dow stocks, an easier approach is to invest in a Dow exchange-traded fund (ETF) like the SPDR Dow Jones Industrial Average ETF Trust is. (DIA 0.53%). The ETF has an expense ratio of 0.16% and a respectable $37.7 billion in net assets. Because the Dow is a price-weighted index, Nvidia’s holdings are relatively small, accounting for just 2.1% of the index. So investing $1,000 in the SPDR Dow Jones Industrial Average ETF Trust essentially means investing $979 in 29 other components and $21 in Nvidia.
The Dow is a solid choice for people looking for greater value and income than other indexes. SPDR Dow Jones Industrial Average ETF Trust has a P/E ratio of 26.2x and a yield of 1.7%. This outperforms the Vanguard S&P 500 ETF’s 29.8 P/E and 1.3% yield, or the Vanguard S&P 500 ETF’s 29.8 P/E and 0.6% yield, which tracks the performance of the Invesco QQQ Trust, which has a P/E of 41.2 and a 0.6% yield. more value and more passive income. Nasdaq-100 (Top 100 stocks in the Nasdaq Composite Index, excluding financial stocks).
Approach Nvidia in the way that works best for you
In just a few years, Nvidia has gone from a hot tech stock to the world’s most valuable company, disrupting the balance of the S&P 500, the Nasdaq Composite, and now the Dow Jones Industrial Average. This is good news for investors who are bullish on Nvidia, but not for those who believe Nvidia is overvalued.
Since Nvidia is a very small percentage of the Dow, buying the Dow ETF is a great way to get exposure to top companies without allocating too much to Nvidia. If you’re interested in more income and value, other low-cost ETF ideas worth considering include Vanguard Value ETF, Vanguard Mega Cap Value ETF, and Vanguard High Dividend Yield ETF.
Nvidia is arguably the most unique company in decades. Because even though its growth is very fast, profits are driving the story. Over the past few years, we’ve seen exciting companies with potential generate big returns. These companies’ investment deals were based on expectations for rapid revenue growth and future profits. NVIDIA, on the other hand, has been delivering some really impressive revenue growth right before our eyes, and they’re doing it in a big way.
In its most recent quarter, Nvidia achieved a record net profit of $19.3 billion. For context, Microsoft had net income of $24.7 billion in its most recent quarter.
Nvidia is one of the most profitable companies in the world and is also growing faster than any other giant tech company. Until this situation changes, Nvidia is likely to continue rewarding investors. But that doesn’t mean you have to buy stocks if they don’t suit your risk tolerance.
Daniel Felber has no position in any 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: A January 2026 $395 long call on Microsoft, a February 2025 $27 short call on Intel, and a January 2026 $405 short call on Microsoft. The Motley Fool has a disclosure policy.
