Is Nvidia a Better Buy Than Other Dow Stocks?

Nvidia (NVDA) has recently taken the place of Intel in the Dow Jones Industrial Average (DJIA), which adds further tech and semiconductor exposure to this iconic index. However, after experiencing an astonishing 910% increase since early last year, some investors are starting to question whether Nvidia's rally might be overdone, and they wonder if investing in other stocks could be a more intelligent choice.

This article explores the reasons why Nvidia may still be a worthwhile growth stock to consider now, as well as why investing in a Dow ETF might be a better option for certain investors.

Reasons to Consider Nvidia

Nvidia has transformed itself from primarily a gaming and graphics company into a front-runner in the development of innovative products that are at the heart of advanced artificial intelligence (AI) applications. The simplest justification for investing in Nvidia is the belief that it will continue to dominate in the AI sector. If Nvidia's customers successfully monetize AI, they will likely buy more of Nvidia's products, boosting the company's profits further.

Despite whispers about a slowdown in the AI sector, Nvidia continues to report strong sales and impressive earnings growth. Over the past year, Nvidia's stock price has risen by 130.7%, while its earnings have surged by 112.6%. This suggests that its valuation is still reasonable. However, analysts are cautioning that growth may eventually slow, with a projected $4.37 in earnings per share (EPS) for fiscal 2026 compared to $2.95 for fiscal 2025.

For Nvidia to consistently outperform the Dow, it needs to continue growing its earnings in a way that justifies its current valuation. For example, if Nvidia's earnings grow at an average rate of 25% over the next five years, and its stock price increases by an average of 20% annually, it could still outperform the Dow, which has historically averaged around a 10% annual gain. Under this scenario, Nvidia's price-to-earnings (P/E) ratio would decrease from 56.1 to 45.8 over that time.

Ultimately, sustained earnings growth is incredibly powerful in the stock market. While Nvidia doesn’t need to double its earnings every year to be a strong investment, it must avoid a significant slowdown; otherwise, the stock could start to look overvalued.

Why an ETF of the Dow May Be a Better Alternative

Investors might consider a more straightforward approach by buying a Dow exchange-traded fund (ETF), such as the SPDR Dow Jones Industrial Average ETF Trust (DIA). This ETF carries a low expense ratio of 0.16% and manages approximately $37.7 billion in assets. Since the Dow is a price-weighted index, Nvidia represents only about 2.1% of it. Therefore, if an investor puts $1,000 into this ETF, about $979 would go into the other 29 stocks, and only $21 would be allocated to Nvidia.

For those who seek more value and income, the Dow ETF can be an attractive choice. It features a P/E ratio of 26.2 and provides a yield of 1.7%, which is better than the 29.8 P/E ratio and 1.3% yield of the Vanguard S&P 500 ETF or the 41.2 P/E ratio and 0.6% yield of the Invesco QQQ Trust.

Deciding the Best Approach for You

Nvidia's rapid rise has turned it into the most valuable company in the world, reshaping the landscape of major indices like the S&P 500, the Nasdaq Composite, and now the Dow. This news benefits bullish investors in Nvidia but can leave those feeling wary about the stock’s valuation in a precarious position.

Since Nvidia is a small part of the Dow, investing in a Dow ETF remains an excellent way for individuals to gain exposure to top-performing companies without overly exposing themselves to Nvidia. Some other low-cost ETFs for those interested in value and income include the Vanguard Value ETF, Vanguard Mega Cap Value ETF, and the Vanguard High Dividend Yield ETF.

Nvidia is a unique enterprise, having quickly ascended in value due to robust earnings growth. In its most recent quarterly report, Nvidia recorded a remarkable net income of $19.3 billion. In comparison, Microsoft generated $24.7 billion in net income during the same period.

As one of the most profitable companies globally, Nvidia is also experiencing faster growth than its major tech counterparts. As long as this trend continues, Nvidia is likely to keep rewarding its investors. However, this does not mean it aligns with everyone's investment strategies, particularly those who are conservative or risk-averse.

Nvidia, Dow, ETF, Investment, AI, Stocks, Growth