Hello Nvidia, Goodbye Intel? Why the Dow Could Get an AI Upgrade.

The Dow is weighted by price, not market capitalization. That means that stocks with a very high absolute share price (like Nvidia currently) would skew the daily returns.

UnitedHealth
,

with a stock price around $517, is the biggest component of the Dow, with a weighting of about 8.6%. Nvidia, at current levels, would have more than double that weighting. The stock closed on Thursday at $1,037.99.

But once Nvidia shares fall to the low $100-ish range after the split takes effect June 7, the stock could make sense as a new Dow component. It would seem to be a fairly easy decision to make.

Nvidia is already a top stock in the

S&P 500

and the numerous index mutual funds and ETFs that track it. However, becoming part of the Dow would solidify the company’s status as one of the most influential companies in America.

Meanwhile, chip rival

Intel

—which is struggling to catch up to Nvidia and is fighting for scraps in the AI chip business with rival

Advanced Micro Devices

—is the Dow’s lowest-weighted constituent. With a stock price of around $30, Intel makes up just 0.5% of the index. The company’s market value is now under $130 billion, while Nvidia is worth nearly $2.6 trillion.

So could Nvidia soon get added to the Dow at Intel’s expense? Intel’s stock, interestingly, fell 4% Thursday while Nvidia soared 9%. The

Nasdaq Composite

and the Philadelphia Semiconductor Index both rallied in early trading but gave up their gains amid a broader market selloff in the afternoon.

A spokeswoman for S&P Dow Jones Indices—which manages the DJIA and other Dow averages, as well as the S&P 500 and other S&P indexes—declined to comment.

However, the company does share its methodology for maintaining the Dow Jones averages, and several lines are particularly telling. S&P Dow Jones Indices says “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.” All of those qualities can be used to describe Nvidia. 

The methodology also says the company’s committee “evaluates stock price when considering a company for inclusion” and “monitors whether the highest-priced stock in the index has a price more than 10 times that of the lowest.” UNH’s stock price is currently more than 17 times that of Intel’s.

Finally, S&P Dow Jones Indices notes that “maintaining adequate sector representation within the index is also a consideration in the selection process for the Dow Jones Industrial Average.” In that case, would there be any cleaner swap than adding Nvidia, the current dominant global force in semiconductors, for Intel, the former leader in the industry back when chips for PCs mattered most?

There are also recent precedents for tech stocks getting added to the Dow after stock splits.

Amazon.com

joined the index in February, replacing

Walgreens Boots Alliance
.

That wouldn’t have been possible when Amazon had a quadruple-digit stock price. But it implemented a 20-for-1 stock split in June 2022.

Walmart
’s

decision to split its stock earlier this year also paved the way for Amazon’s inclusion, since that move reduced the representation of the retail sector in the Dow.

And then there’s

Apple
.

The iPhone maker split its stock 7 for 1 in June 2014, a move that reduced its price from around $700 to about $100. Apple was added to the Dow in March 2015, replacing AT&T.

So if the people at S&P Dow Jones Indices are following the same playbook, don’t be surprised to see Nvidia in—and Intel out of—the Dow later this year or in early 2025.

Write to Paul R. La Monica at paul.lamonica@barrons.com