The Dow Jones Industrial Average (^DJI 0.04%) has roots in the 19th century. The index debuted as a daily average of a dozen industrial stocks in 1896, but more companies were added in subsequent years, such that the Dow Jones had 30 components by 1928. The index still tracks 30 companies today, though it is no longer limited to industrial stocks.
The Dow Jones does not have specific eligibility criteria, but the selection committee focuses on companies with three traits: an excellent reputation, sustained growth, and widespread interest among investors. The committee also considers share price when making selection decisions.
To elaborate, the S&P 500 (^GSPC 0.16%) and the Nasdaq Composite (^IXIC 0.49%) are weighed by market capitalization, but the Dow Jones is weighted by price. That means higher-priced stocks have the more influence over the index's performance than lower-priced stocks, regardless of what the underlying companies are worth.
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Amazon joined the Dow Jones in February, and Nvidia could be the next candidate
Amazon (AMZN 3.90%) became the newest artificial intelligence (AI) stock in the Dow Jones Industrial Average in February 2024, when it replaced Walgreens Boots Alliance. That event is noteworthy because new additions are relatively few and far between. Prior to Amazon, the index had not been changed since August 2020.
However, if another company is added in the near future, my money is on Nvidia (NVDA 0.25%). The chipmaker has an excellent reputation given its critical position in the artificial intelligence value chain. It has reported strong financial results on a somewhat regular basis. And investors have been buying the stock hand over fist, driving its share price 495% higher over the last two years.
Additionally, Nvidia has a 10-for-1 stock split planned for June 7, which will bring its price down to a more reasonable level, probably somewhere around $116 per share. That's important because its current price (about $1,165 per share) is roughly twice as high as any other component of the Dow Jones. In other words, Nvidia would not be a good candidate without the stock split because its share price is too high.
So far, I've skirted an important question. While inclusion (or even possible inclusion) in the Dow Jones is noteworthy, it does not necessarily mean Amazon and/or Nvidia are good investments. So, are the stocks worth buying?
Amazon: Dominance in cloud computing paves the way for AI monetization
Amazon looked strong in the first quarter. Revenue increased 13% to $143 billion on robust sales growth in third-party seller services (16%), cloud computing (17%), and advertising services (24%). Additionally, the company reported its highest quarterly operating margin in history, and GAAP net income more than tripled to reach $0.98 per diluted share.
One reason for the profound improvement in profitability is the recent regionalization of its fulfillment network, which lowers costs and hastens delivery times by storing items closer to customers. Last year, Amazon achieved its first per-unit reduction in retail cost to serve since 2018, and it recorded its fastest delivery speeds in history for Prime members in the first quarter of 2024. Management sees room for further margin expansion in the retail business with help from robotics and automation.
Turning toward the future, Amazon's greatest opportunity arguably lies in cloud computing, a market projected to grow at 21% annually through 2030. Amazon Web Services (AWS) is the market leader in cloud infrastructure and platform services, meaning the it's already well positioned to benefit as AI draws more IT spending to the cloud. But the company is also investing in AI product development.
In September, AWS launched Amazon Bedrock, a cloud service that provides access to pretrained models for building generative AI applications. In April, the company announced the general availability of Amazon Q Developer, a conversational assistant that automates coding. On the most recent earnings call, CEO Andy Jassy called Amazon Q the "most capable generative AI-powered assistant for software development."
Wall Street expects Amazon to grow earnings per share at 23% annually over the next three to five years. That consensus estimate makes the current valuation of 50.2 times earnings look reasonable. Those numbers give a PEG ratio of 2.2, a discount to the five-year average of 2.8. To that end, I would personally feel comfortable buying this stock today.
Nvidia: The AI chipmaker has expanded into AI networking, software, and services
Nvidia reported phenomenal financial results in the first quarter of fiscal 2025 (ended April 28). Revenue increased 262% to $26 billion and non-GAAP net income rocketed 461% to $6.12 per diluted share. Demand for AI hardware solutions was the driving force behind that strong performance, and Nvidia still has excellent growth prospects.
Today, Nvidia generates most revenue from graphics processing units (GPUs), but the company has several up-and-coming data center products. For instance, networking revenue more than tripled during the first quarter to reach $3.2 billion. Its subscription software and cloud services business achieved an annual revenue run rate of $1 billion in the previous quarter. And CEO Jensen Huang says Nvidia's first central processing unit (CPU) is ramping toward a multi-billion-dollar product line.
Looking ahead, Grand View Research estimates that AI spending across hardware, software, and services will increase at 37% annually through 2030. Meanwhile, Wall Street expects Nvidia to grow earnings per share at 38% annually over the next three to five years. That forecast makes the current valuation of 68 times earnings look surprisingly reasonable. Indeed, those numbers give a PEG ratio of 1.8, a significant discount to five-year average of 3.4.
For that reason, I would feel comfortable buying a small position in Nvidia today. But investors should understand the downside risk. The stock could decline sharply if Nvidia fails to meet Wall Street's lofty expectations.
