NVIDIA’s Entry to the Dow: Will the Inclusion Spark a New Surge in its Stock Price?

The recent announcement that Nvidia ( $NVIDIA Corp(NVDA)$ ) will replace Intel in the Dow Jones Industrial Average ( $.DJI(.DJI)$ ) has sparked significant interest among investors and analysts alike. This change, set to take effect on November 8, 2024, is expected to have a substantial impact on Nvidia's stock price. This article explores the logical connection between Nvidia's addition to the DJIA and the anticipated rise in its stock price, the importance of this move, and historical examples to support this claim.

Nvidia Shares Extend After the Bell Gains, Last up 2.8%

The Rationale for a Stock Price Rise

NVIDIA’s entry into the DJIA is significant because the Dow remains one of the most influential stock indices worldwide, often shaping investor sentiment and institutional portfolio compositions. When a company is added to the DJIA, several factors generally contribute to an increase in its stock price:

1. Institutional Buying Pressure: Fund managers and institutional investors frequently align their portfolios with major indices. As such, the addition of NVIDIA to the Dow will likely prompt many funds to acquire its shares, increasing demand and potentially driving up its price.

2. Increased Exposure and Credibility: Entry into the Dow elevates a company's profile, affirming its stability and importance in the U.S. economy. NVIDIA’s inclusion acknowledges its leading role in the AI boom, enhancing its appeal to investors who might otherwise have been cautious due to its high valuation.

3. Stock Split Accessibility: NVIDIA’s recent 10-for-1 stock split lowered its share price, aligning it with the price-weighted structure of the Dow. This move made NVIDIA more attractive to the index committee and potentially more accessible to retail investors, as lower per-share prices can often appeal to broader audiences.

4. AI-Driven Valuation Growth: NVIDIA’s role as the primary supplier of data centre AI processors has positioned it as a major player in the trillion-dollar technology sector. The stock’s 180% surge in 2024 reflects its anticipated revenue growth from the AI industry, a perception that inclusion in the Dow may further validate.

Why Is This Inclusion Important?

The Dow Jones is a price-weighted index, meaning that stocks with higher share prices exert more influence on its movement. NVIDIA's addition gives the DJIA additional exposure to the rapidly growing AI sector and brings the index more in line with the broader technology sector's importance in today's economy. NVIDIA’s immense valuation and influence in AI align with other tech giants like Microsoft and Apple, both also part of the Dow. In contrast, Intel's challenges in adapting to AI trends and competitive manufacturing setbacks underscore the importance of a technology giant like NVIDIA joining the index.

This shift in representation within the Dow reflects a growing recognition of AI’s economic impact, underscoring NVIDIA's critical role in the sector and its relevance to investors seeking exposure to cutting-edge technology and growth.

Historical Examples: Stock Price Impacts from DJIA Inclusion

History provides several examples that support the notion of a stock price increase following DJIA inclusion:

• Apple’s Addition in 2015: Apple’s entry into the Dow was preceded by strong anticipation and a subsequent rally. Its inclusion was interpreted as a stamp of approval for its dominant position in consumer technology, which has since been further validated by its rise to a trillion-dollar valuation.

• Salesforce in 2020: When Salesforce replaced Exxon Mobil in 2020, its stock experienced an upward trend. This transition marked a shift in the Dow’s focus toward technology and away from traditional energy stocks, which has since been beneficial given the growth in the tech sector.

Both examples illustrate how inclusion in the Dow can lead to increased investor interest and inflows, given the elevated visibility and implied endorsement by one of the world's most prestigious indices.

Contrarian Examples: DJIA Inclusion Without a Lasting Price Surge

While there is often a short-term bump in stock prices, not all companies see a lasting impact from DJIA inclusion:

• Walgreens Boots Alliance: After being added to the Dow in 2018, Walgreens did not see sustained price growth. In fact, the stock’s performance remained sluggish due to ongoing challenges in the retail pharmacy sector. Walgreens was eventually replaced by Amazon in 2023, highlighting that inclusion does not guarantee long-term price appreciation.

• Cisco in 2009: Similarly, Cisco’s inclusion in the Dow failed to trigger a long-lasting surge. Cisco’s stock traded largely sideways due to stagnant growth and shifting investor interest toward faster-growing tech firms, highlighting that only companies with sustained innovation and growth can capitalize on the benefits of index inclusion.

These examples show that while the initial attention and demand boost can increase prices, long-term gains depend on the company’s ability to sustain growth and adapt to market demands.

Conclusion: What NVIDIA’s Inclusion Means for Investors

The addition of NVIDIA to the DJIA underscores the index’s shift towards embracing AI and advanced technology. Although the short-term impact on NVIDIA’s stock price may be positive due to heightened demand and institutional buying, its long-term success will hinge on maintaining its lead in the AI sector and successfully meeting rising expectations. Historically, Dow inclusion has often correlated with price gains, yet sustained growth requires innovation and market relevance. NVIDIA’s strong track record in AI positions it favourably, yet the company must continue to navigate technological advancements and competitive pressures to solidify its place in the index and the market.

For investors, NVIDIA’s entry into the Dow marks a rare opportunity to gain exposure to AI within a blue-chip framework, blending growth potential with the stability associated with the DJIA.

@TigerWire