Over the past thirty years, Wall Street has had no shortage of next-big-thing innovations. Just over a week ago, the two hottest trends in the stock market collided: the rise of artificial intelligence (AI) and investors’ love for companies that implement stock splits.
After the close of trading on June 7, AI kingpin Nvidia (NASDAQ: NVDA) completed the previously announced 10-for-1 stock split.
A demerger allows a publicly traded company to change its share price and the number of shares outstanding without affecting its market capitalization or operating performance. In the case of Nvidia, it increased the number of outstanding shares of the company by a factor of 10, while lowering the stock price to 1/10 of what it was before. For retail investors who don’t have access to stock purchases through their broker, it’s a lot easier to buy a single share of Nvidia today than it was two weeks ago.
But more than just making the shares more nominally affordable for ordinary investors, Nvidia’s second stock split since July 2021 is fueling speculation that the now lower share price could lead to inclusion in Nvidia’s iconic share price. Dow Jones Industrial Average (DJINDICES: ^DJI).
When the Dow Jones was officially introduced on May 26, 1896, it consisted of twelve constituents, most of which were industrial companies. But over the past 128 years, the index has evolved into a multinational index with 30 components that is representative of many sectors and industries.
Does the third largest company by market cap, Nvidia, have a reasonable chance of joining the Dow Jones in the near future? Let us let history be our guide.
The case against Nvidia’s inclusion in the Dow Jones
Since May 1896, the Dow Jones Industrial Average has undergone 52 changes. By ‘changes’ I mean the removal and/or addition of companies to the index. These changes are overseen by S&P Dow Jones Indices, with the last one occurring just over three months ago on February 26, when the e-commerce leader Amazon was added to the Dow and pharmacy chain Walgreens Boots Alliance had been removed.
The first negative for Nvidia is that S&P Dow Jones Indices is trying to keep the Dow diverse, which is a lot harder with only a 30 component index compared to the S&P500 (SNPINDEX: ^GSPC), which includes 500 of the largest listed companies. The Dow Jones already contains six technology stocks — Apple, Sales team, Cisco systems, IBM, Intel (NASDAQ: INTC)And Microsoft – which is more than any other sector.
The second red point against Nvidia for inclusion is that size isn’t everything for the committee that oversees the additions and subtractions of this timeless index. Even though Nvidia is a nearly $3 trillion company and its graphics processing units utterly dominate AI-accelerated data centers, the Dow has left some big companies on the outside looking in.
Alphabet, MetaplatformsAnd Berkshire Hathaway have market values of $2.19 trillion, $1.29 trillion, and $881 billion, respectively, and each makes a compelling case for inclusion. Nvidia’s market cap is not a selling point for S&P Dow Jones Indices.
The third and final problem that Nvidia would need to overcome is the lack of maturity for its main revenue source, artificial intelligence. Understand that I am in no way calling Nvidia an immature company. However, companies included in the Dow Jones are often chosen for their proven business models and their importance within the US and/or global economy.
While sales forecasts for AI companies have skyrocketed, there hasn’t been a next-big-thing trend in thirty years that has prevented a bubble burst. S&P Dow Jones Indices might be wary of including a company whose main growth driver could disappear in the coming quarters.
The biggest reason why Nvidia would be a smart addition to the Dow Jones
But it’s not just red marks against inclusion for Nvidia. The fact that the Dow Jones Industrial Average is weighted by share price and not by market capitalization definitely works in its favor.
For example, the S&P 500 includes 500 companies, each with their own respective weightings. The larger the company is, in terms of market capitalization, the more weight it will have in the S&P 500. That’s why a 1% move in its largest component, Microsoft ($3.22 trillion market cap), is much more will affect the market capitalization. moves in the point value of the S&P 500 than if the smallest component of the index, the regional bank, were Comerica ($6.2 billion market cap), moves 1%.
The point value of the Dow Jones is derived entirely from the total share price of the 30 components. Since UnitedHealth Group has a share price of almost $500 and has the highest weighting within the Dow Jones Industrial Average. At around $120 per share, Nvidia would be only the 22nd most influential Dow component.
The underperformer with the lowest stock price and the least impact on the Dow Jones right now is (drumroll)…Intel! The central processing unit (CPU) giant closed the June 11 session at less than $31 per share.
A fair argument can be made that Nvidia’s chips are both the present and the future, relative to Intel’s largely legacy-based CPU business. Even though Intel is launching its own AI-accelerating chip, the Gaudi 3, in the third quarter, it is barely registering a market share in the high-compute data center sector behind Nvidia and Advanced micro devices.
Often there is no logical one-for-one substitution when it comes to whether or not a company should be included in the Dow Jones Industrial Average. This would be about as a no-brainer of a trade as there has been in a while.
The Verdict: Will Nvidia Be Added to the Dow?
Considering the historical factors that have led to 52 changes in the Dow Jones over a 128-year period, I tend to believe that the S&P Dow Jones Indices possibly (key word!) Trade Intel for Nvidia, but in absolutely no rush to do so.
On a nominal dollar basis (i.e. excluding the dividends Intel has paid out to its shareholders), Intel’s shares have fallen 19% since it was added to the Dow Jones on November 1, 1999. That’s almost 25 years of negative returns. while the Dow Jones has gained 264% over the same period. S&P Dow Jones Indices absolutely wants companies that continue to grow and take the Dow Jones index to a higher level in the long term. Intel simply hasn’t shown that it can do that.
Don’t get me wrong: I’m an Intel shareholder and believe its foundry services segment and AI initiatives will be winners in the long run. But as a Dow component it was terrible.
While Nvidia is a logical replacement, there is genuine concern that the AI bubble will burst sooner or later. Just as history has helped predict which stocks might be included in the Dow Jones, it has shown us that every subsequent major innovation has fallen on its head early in the growth cycle.
Investors have a terrible habit of overestimating the introduction of new technologies, and AI has a long shot at breaking this trend. S&P Dow Jones Indices will likely be reluctant to add Nvidia to the index until it is certain that AI has matured as a technology.
Once this maturation process has taken place and companies have an idea of how to use AI solutions to their advantage, Nvidia has a terribly good chance to displace Intel.
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Suzanne Frey, a director at Alphabet, is a member of The Motley Fool’s board of directors. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, former director of market development and spokeswoman for Facebook and sister of Mark Zuckerberg, CEO of Meta Platforms, is a member of The Motley Fool’s board of directors. Sean Williams holds positions in Alphabet, Amazon, Intel, Meta Platforms and Walgreens Boots Alliance. The Motley Fool holds positions in and recommends Advanced Micro Devices, Alphabet, Amazon, Apple, Berkshire Hathaway, Cisco Systems, Meta Platforms, Microsoft, Nvidia, and Salesforce. The Motley Fool recommends Intel, International Business Machines and UnitedHealth Group. The Motley Fool has a disclosure policy.
Will Nvidia be added to the Dow Jones? This is what 128 years of history suggests will happen. was originally published by The Motley Fool
