Nvidia (NASDAQ: NVDA) replace Intel in the Dow Jones Industrial Average(DJINDICES: ^DJI) earlier this month, adding even more technology and semiconductor exposure to the historical index.
But with Nvidia up 910% since the start of last year, some investors may be wondering whether the rally has gone too far and investing in other stocks might be a better option.
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Here are some reasons why Nvidia could still be a growth stock worth buying right now, but why investing in the Dow Jones could be an even better buy for some investors.
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Nvidia became the most valuable company in the world by transforming from a gaming and graphics visualization company to developing cutting-edge products that power cutting-edge artificial intelligence (AI) applications. The simplest reason to buy Nvidia is that you believe it will continue to be a leader in AI, and that its customers will be able to monetize AI to increase profits and create even more products from Nvidia to buy.
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% in the last year, but earnings are up 112.6%, so the valuation is still somewhat reasonable. But analysts expect growth to cool, calling for fiscal 2026 earnings per share (EPS) of $4.37, up from $2.95 in fiscal 2025 (Nvidia just reported third-quarter results quarter of fiscal year 2025). Still, that represents 48% earnings growth in one year.
The simplest way for Nvidia to outperform the Dow Jones over time is for its fundamentals to grow to its current valuation. This would mean that earnings should continue to grow at a pace that can support already strong stock gains, without further stretching the valuation. Here’s an example of how that could play out.
Let’s say the cyclicality of the semiconductor industry and some margin erosion from competition means that Nvidia will grow earnings by an average of 25% over the next five years. If the stock price rises an average of 20% over that period, it will likely outperform the Dow Jones. S&P500 – which has averaged annual gains of around 10% over the long term and an even better 13.5% over the past ten years. The valuation would also drop from a price-to-earnings (P/E) ratio of 56.1 to a price-to-earnings ratio of 45.8. P/E ratio. If the country were to maintain the same growth rates for ten years, the price/earnings after ten years would be 37.3.
There is nothing more powerful in the stock market than sustainable earnings growth. Nvidia doesn’t need to keep doubling its revenue every year to be a huge investment, but at this point it also can’t afford to see a sharp decline in growth, otherwise the stock could start to look overvalued.
While you could buy individual (or partial) shares of all the other 29 components of the Dow Jones, a much simpler approach would be to invest in a Dow Exchange Traded Fund (ETF) such as the SPDR Dow Jones Industrial Average ETF Trust(NYSEMKT: DIA). The ETF has an expense ratio of 0.16% and a respectable net asset value of $37.7 billion. Because the Dow is a price-weighted index, Nvidia is a relatively small holding, making up just 2.1% of the index. So investing $1,000 in the SPDR Dow Jones Industrial Average ETF Trust essentially means $979 in the other 29 components and $21 in Nvidia.
The Dow is a solid choice for people looking for more value and income than the other index. The SPDR Dow Jones Industrial Average ETF Trust has a price/earnings ratio of 26.2 and a yield of 1.7%. This is a better value and offers more passive income than the 29.8 price/earnings ratio and 1.3% yield of the Vanguard S&P 500 ETF or the price/earnings ratio of 41.2 and a yield of 0.6% of the Invesco QQQ Trust – which tracks the performance of the Nasdaq-100 (the 100 largest components in the Nasdaq Compositeexcluding financial shares).
In just a few years, Nvidia went from a notable technology stock to the most valuable company in the world, upsetting the balance of the S&P 500, the Nasdaq Composite and now the Dow Jones Industrial Average. This is great news for investors who are bullish on Nvidia, but not for people who believe Nvidia is overvalued.
Because Nvidia makes up so little of the Dow Jones, buying a Dow ETF is still a great way to gain exposure to top companies without allocating too much to Nvidia. Other low-cost ETF ideas that may be worth a look if you’re interested in more income and value include the Vanguard Value ETFthe Vanguard Mega Cap Value ETFand the Vanguard ETF with high dividend yield.
Nvidia may be the most unique company we’ve seen in decades because it has grown so quickly, and yet its profits are the driving force behind the story. In recent years we have seen exciting companies packed with potential profits produce disproportionate profits. The investment case for these companies rested on the expectation of rapid sales growth and future profits. Nvidia, on the other hand, is achieving truly remarkable earnings growth right before our eyes, and doing it in a big way.
Last quarter, Nvidia posted a record net profit of $19.3 billion. For context, MicrosoftLast quarter there was a net profit of $24.7 billion.
Nvidia is one of the most profitable companies in the world and is also growing faster than all of its mega-cap tech companies. Until that changes, Nvidia will likely continue to reward its investors. But that doesn’t mean you should buy the stock if it doesn’t fit your risk tolerance.
Consider the following before buying shares in Nvidia:
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Daniel Foelber has no position in any of the stocks mentioned. The Motley Fool holds 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 at Microsoft, short February 2025 $27 calls at Intel, and short January 2026 $405 calls at Microsoft. The Motley Fool has a disclosure policy.
Better Buy Now: Nvidia or the Other 29 Stocks in the Dow Jones Industrial Average? was originally published by The Motley Fool
