Nvidia (NASDAQ: NVDA) replaced Intel in the Dow Jones Industrial Average (DJINDICES: ^DJI) earlier this month, adding even more tech and semiconductor exposure to the historic index.
But with Nvidia up 910% since early last year, some investors may be wondering if the rally has gone too far and investing in other stocks may be a better option.
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Here are some reasons why Nvidia could still be a growth stock worth buying now, but why investing in the Dow may be an even better buy for some investors.
Nvidia became the most valuable company in the world by transforming from a gaming and graphics visualization company to developing cutting-edge products that are powering advanced artificial intelligence (AI) applications. The simplest reason to buy Nvidia is that you believe it will remain a leader in AI, and that its customers will be able to monetize AI to grow profits and buy even more of Nvidia’s products in the future.
Despite concerns that the AI megatrend is slowing down, Nvidia continues delivering impeccable sales and earnings growth. Nvidia’s stock price is up 130.7% over the last year, but its earnings are up 112.6%, so its valuation is still somewhat reasonable. But analysts expect growth to cool, calling for $4.37 in fiscal 2026 earnings per share (EPS) compared to $2.95 in fiscal 2025 (Nvidia just reported third-quarter fiscal 2025 results). Still, that represents 48% earnings growth in a single year.
The most straightforward way for Nvidia to outperform the Dow over time is for its fundamentals to grow into its current valuation. This would mean continuing to grow its earnings at a rate that can support outsized stock gains already seen without further stretching the valuation. Here’s an example of how that could play out.
Let’s say that the cyclicality of the semiconductor industry and some margin erosion from the competition leads Nvidia to grow earnings by, on average, 25% over the next five years. If its stock price goes up by 20% on average during that time frame, it will likely outperform the Dow and the S&P 500 — which has averaged around a 10% annual gain over the long term and an even better 13.5% over the last decade.It would also see its valuation drop from a 56.1 price-to-earnings (P/E) ratio to a 45.8 P/E ratio. If it kept up those same growth rates over 10 years, its P/E would be 37.3 after a decade.
There is nothing more powerful in the stock market than sustained earnings growth. Nvidia doesn’t have to keep doubling its earnings every year in order to be a tremendous investment, but right now, it also can’t afford to see its growth fall off by much, or the stock could begin to look overvalued.
