Is Nvidia a Better Investment Than Other Dow Stocks?

Nvidia (NVDA) recently replaced Intel in the Dow Jones Industrial Average (DJIA), increasing the technology and semiconductor presence in this well-known index. However, with Nvidia’s stock price soaring over 910% since last year, some investors might question whether this growth is sustainable or if they should consider diversifying into other stocks.

This article will outline the reasons for investing in Nvidia but will also discuss why investing in the Dow or a Dow-focused exchange-traded fund (ETF) may be more appealing for some investors.

Reasons to Buy Nvidia

Nvidia has transformed itself from a company known primarily for gaming graphics to a leading force in artificial intelligence (AI) technology. Investors interested in Nvidia primarily believe in its continued leadership in the AI sector, anticipating that its clientele will leverage AI advancements to boost profits, consequently driving more business to Nvidia.

Despite some worries that the AI trend may be slowing, Nvidia has maintained robust sales and earnings growth. While its stock has increased by 130.7% over the past year, its earnings have also risen significantly, by 112.6%. This suggests that the current valuation, though high, isn’t entirely unreasonable. Analysts predict that earnings growth may stabilize, projecting a rise to $4.37 per share in fiscal 2026 from $2.95 in fiscal 2025, reflecting a substantial 48% increase in just one year.

Nvidia's potential to outperform the Dow hinges on its ability to sustain and grow its earnings, allowing its stock to justify its current price. For instance, if Nvidia experiences average earnings growth of 25% over five years while its stock rises by around 20% during that period, it could likely beat the Dow and the broader S&P 500 index, which has historically returned about 10% annually. This sustained growth could also lead to a more favorable price-to-earnings (P/E) ratio for Nvidia over time.

Nvidia doesn't need to double its earnings every year to be a worthwhile investment; however, a significant downturn in growth could lead the stock to become overvalued.

Reasons to Consider a Dow ETF Instead

Rather than picking individual stocks from the Dow, another effective strategy could be to invest in a Dow ETF, such as the SPDR Dow Jones Industrial Average ETF Trust (DIA). This ETF has an expense ratio of 0.16% and manages around $37.7 billion in assets. As the Dow is price-weighted, Nvidia comprises only about 2.1% of this index, meaning a $1,000 investment in the ETF essentially allocates around $21 to Nvidia and the remainder to the other 29 Dow stocks.

For those seeking stability and income, the Dow offers a more attractive option. The SPDR ETF has a P/E ratio of 26.2 and yields about 1.7%, which is better than the yields and valuations of both the Vanguard S&P 500 ETF and the Invesco QQQ Trust.

Choosing What’s Right for You

Nvidia's rapid ascent to becoming one of the world’s most valued companies has certainly impressed many investors. However, for those who feel Nvidia may be overvalued, investing in a Dow ETF provides a balanced approach. This option provides exposure to a wider array of leading companies without overcommitting to any single stock.

Interestingly, Nvidia’s remarkable success and earnings potential set it apart from other tech companies, many of which rely solely on future growth expectations. While Nvidia is already demonstrating significant earnings growth, this gives it a solid foundation compared to its competitors.

Recently, Nvidia announced a record net income of $19.3 billion, a figure that highlights its impressive profitability compared to other tech giants like Microsoft, which reported $24.7 billion in net income during the same period.

While Nvidia could continue to deliver value to its investors, it's essential for potential buyers to analyze their risk tolerance before deciding to purchase its stock.

Nvidia, Stocks, Dow