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NVIDIA is a shoo-in for the Dow post stock split

Published 05/31/2024, 02:52 PM
© Reuters

With its latest earnings report, AI darling NVIDIA Corporation (NASDAQ:NVDA) announced a ten-for-one stock split.  The split, which will be distributed at the close on June 7th, will give shareholders ten shares in exchange for each one share they own as of the June 6th record date.  The stock will start trading split-adjusted at market open on Monday, June 10th. The split raises the very real possibility that NVIDIA will be added to the Dow Jones Industrial Average (DJIA), with chip-laggard Intel Corporation (NASDAQ:INTC) seen as the company it will likely replace.

The Dow is a price-weighted index, meaning stocks with higher prices have a bigger impact on the index.  With NVIDIA’s stock over $1000 per share currently, this would give it too much of a weighting in the index.  However, with the ten-for-one split, the stock price would be closer to the $100 level – making an entry into the Dow more feasible and likely.

The last change for the Dow was in February 2024, when Amazon.com Inc (NASDAQ:AMZN) replaced Walgreens Boots Alliance Inc (NASDAQ:WBA).  In August 2020, Salesforce (NYSE:CRM), Honeywell (NASDAQ:HON), and Amgen (NASDAQ:AMGN) replaced ExxonMobil (NYSE:XOM), Raytheon (NYSE:RTN), and Pfizer (NYSE:PFE). 

When asked to comment on speculation that NVIDIA will soon be added to the Dow, S&P Dow Jones Indices, the firm behind the index, said it does not comment or speculate on index additions or deletions.

However, reading the DJIA methodology language carefully hints that NVIDIA will, in fact, be added, and the announcement can come at any time.

It reads: “While stock selection is not governed by quantitative rules, a stock typically is added only if the company has an excellent reputation, demonstrates sustained growth and is of interest to a large number of investors. Since the indexes are price weighted, the Index Committee evaluates stock price when considering a company for inclusion. The Index Committee monitors whether the highest-priced stock in the index has a price more than 10 times that of the lowest. Maintaining adequate sector representation within the index is also a consideration in the selection process for the Dow Jones Industrial Average. Companies should be incorporated and headquartered in the U.S., and a plurality of revenues should be derived from the U.S. Changes to the indices are made on an as-needed basis. There is no annual or semi-annual reconstitution. Rather, changes in response to corporate actions and market developments can be made at any time. Constituent changes are typically announced one to five days before they are scheduled to be implemented. At any given time, the constituents of the Dow Jones Industrial Average, Dow Jones Transportation Average and Dow Jones Utility Average make up the Dow Jones Composite Average.” (bolded by Investing.com)

Five reasons NVIDIA should replace Intel in the Dow

NVIDIA is the third-largest company in the world, with a market value of $2.7 trillion—behind only Microsoft (NASDAQ:MSFT), which has a market value of just over $3 trillion, and Apple (NASDAQ:AAPL), which has a market value of $2.9 trillion. Apple and Microsoft are both in the Dow.

It is the leader in AI, powering applications like ChatGPT, which is expected to be bigger than the Internet.

NVIDIA now dwarfs the once-mighty Intel, which has a market cap of only $128 billion. Intel is the lowest-priced stock in the Dow, and its market cap is near the bottom of the list.

NVIDIA is expected to post revenue of $111.38 billion this year versus $52 billion for Intel.  NVIDIA’s growth is also astonishing versus Intel’s lack of growth.  NVIDIA’s revenue is expected to grow by 83% this year, while Intel’s is expected to fall by 5%.

The inclusion of NVIDIA in the Dow will also be an admission by the DJIA Index Committee that AI is the future of all industries, not just technology.

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