Nvidia Stock Just Did Something It Has Never Done Before. History Says the AI Stock Could Do This Next.

The Dow Jones Industrial Average (DJINDICES: ^DJI) is a price-weighted index that tracks 30 U.S. companies. While inclusion is not based on strict rules, the index committee tends to select stocks that have three qualities: an excellent reputation, sustained growth, and widespread interest among investors.

On Nov. 8, semiconductor company Nvidia (NASDAQ: NVDA) did something it has never done before: It joined the Dow Jones Industrial Average. Sherwin-Williams was added to the index at the same time, while chipmaker Intel and specialty chemicals producer Dow were removed.

Importantly, while inclusion in the iconic index is validating, it has no bearing on business fundamentals like revenue and earnings. But stocks have generally produced positive returns during their first year in the Dow. Here's what that might mean for Nvidia shareholders.

History says Nvidia's stock could return 12% over the next 12 months

The Dow Jones Industrial Average was first introduced in 1896, and its composition has changed infrequently since its inception. Apart from Nvidia and Sherwin-Williams, and the addition of Amazon earlier this year, the most recent changes were made four years ago, when Amgen, Honeywell, Salesforce, and RTX (formerly Raytheon Technologies) were added to the index in 2020.

Furthermore, excluding the three added this year, only 14 companies have joined the Dow Jones in the last 15 years. And their stocks returned a median of 9% during the 12-month period following their inclusion in the index. We can apply that information to Nvidia to make an educated guess about how the stock may perform in the coming months.

Specifically, Nvidia traded near $149 per share when the market opened on Nov. 8, the day the company was added to the Dow Jones. If its share price appreciation aligns precisely with the historical median, Nvidia will trade at $162 per share in November 2025. That implies 12% upside from its current share price of $145.

History also offers another interesting insight. While the last 14 stocks returned a median of 9% during their first 12 months in the Dow, the S&P 500 (SNPINDEX: ^GSPC) returned a median of 17% during the same period. So, most stocks have underperformed the S&P 500 during the 12 months following their inclusion in the Dow.

Of course, Nvidia's future share price cannot be determined by looking backward. How the stock performs during the next year (and beyond) depends on the company's financial results and investor sentiment.

Image source: Getty Images.

Nvidia's AI expertise spans hardware and software

Nvidia's graphics processing units (GPUs) are the industry standard in accelerating complex data center tasks like training machine learning models and running artificial intelligence (AI) applications. In fact, analysts at Forrester Research went so far as to write, "Without Nvidia's GPUs, modern AI wouldn't be possible."

Nvidia reported excellent financial results in the third quarter, blowing by estimates on the top and bottom lines. Revenue increased 94% to $35 billion, and non-GAAP (generally accepted accounting principles) earnings surged 103% to $0.81 per diluted share. Nvidia's earnings have now increased at a triple-digit pace for six consecutive quarters. Of course, that trend cannot go on indefinitely, but investors still have good reason to be optimistic.

CFO Colette Kress on the earnings call highlighted strong demand for Hopper GPUs, saying that H200 sales have ramped more quickly than any other product in company history. She also said the next-generation Blackwell GPU is in full production, and that "demand is staggering." Compared to Hopper, Blackwell chips can handle AI training tasks up to four times faster, and they can handle AI inference tasks up to 30 times faster.

Kress also discussed the strong uptake of Nvidia AI Enterprise, a software platform that helps businesses build and deploy a broad range of AI applications, from recommender systems for retail to conversational agents for customer service. Kress told analysts that full-year revenue from Nvidia AI Enterprise software would more than double in the current year. She also said software and services revenue would exit the year at an annual run rate exceeding $2 billion.

In mentioning all these products, my goal is to impress upon readers that Nvidia has a key advantage in its ability to monetize AI across hardware and software. Indeed, Blayne Curtis at Jefferies highlighted that competitive moat. "Nvidia is in control of the ecosystem on both the hardware and software front, and their current cadence of new generations should make that lead only growth further," he wrote in a note to clients.

Looking ahead, Wall Street estimates Nvidia's adjusted earnings will grow at 38% annually through fiscal 2027, which ends in January 2027. That makes the current valuation of 56 times adjusted earnings look reasonable. Admittedly, Wall Street has set Nvidia with a high bar, and the stock could plunge if the company fails to meet those expectations.

Even so, patient investors comfortable with volatility should consider buying a few shares today, even though new Dow Jones stocks have historically underperformed the S&P 500 during their first year in the index.

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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Trevor Jennewine has positions in Amazon and Nvidia. The Motley Fool has positions in and recommends Amazon, Intel, Jefferies Financial Group, Nvidia, and Salesforce. The Motley Fool recommends Amgen, RTX, and Sherwin-Williams and recommends the following options: short November 2024 $24 calls on Intel. The Motley Fool has a disclosure policy.