Intel is likely to be kicked out of the Dow, but Nvidia may not be its logical replacement

For more than 128 years, Dow Jones Industrial Average (^DJI -1.01%) served as the most prominent barometer of the stock market’s health on Wall Street.

When it debuted on May 26, 1896, it was composed of 12 mostly industrial companies. Today, the Dow Jones is a mix of 30 time-tested multinational companies from a variety of sectors and industries.

Image source: Getty Images.

However, the Dow has a major difference/glaring flaw compared to the other major Wall Street stock indexes, S&P 500 and Nasdaq Composite. While the point values ​​of the latter two indices are determined by market capitalization weighting, the Dow’s value is derived entirely from stock price weighting. In other words, the higher the share price of a publicly traded company, the more influence it has within this ageless index.

For example, Walmart is a $620 billion company as of this writing and the fourth largest Dow component by market cap. But its share price of $77 is only 25th overall among the Dow’s 30 constituents. Second smallest component after market cap ($53 billion), insurer Travel companieswields three times the leverage of Walmart with its stock price of about $231.

When Dow stocks underperform over long periods or their share price falls too low, they are often at risk of being kicked out of this flagship index. A stalwart in semiconductor Intel (INTC -2.63%)whose stock price has fallen below $20, is very likely to be shown the door sooner rather than later. Surprise is that artificial intelligence (AI) pawn. Nvidia (NVDA -4.08%) it might not be the slam-dunk replacement you think it would be.

Intel’s time in the Dow may be coming to an end

Central processing unit (CPU) goliath Intel was added to the Dow Jones Industrial Average on November 1, 1999. On a nominal basis (that is, excluding dividend payments), the stock has fallen 49% since that addition. But even with dividends factored into its returns, the stock is down 7% in nearly a quarter century.

S&P Dow Jones Indices, which is the body that decides which companies enter and exit this widely watched index, can’t be happy with Intel’s performance or its microscopic influence right now.

Intel’s problems are threefold. First, it fell behind the innovation curve and allowed Nvidia’s graphics processing units (GPUs) to become the undisputed top choice in AI-accelerated data centers. Even though Intel unveiled its Gaudi 3 AI accelerator chip in April of this year, it’s painfully obvious that the company missed an early-stage sales opportunity.

Second, the company is building its foundry services segment from the ground up. This includes two chip manufacturing plants in Ohio, as well as another in Germany. Despite its ambitions to become the world’s second-largest foundry by 2030, building the infrastructure to do so is exceptionally expensive and takes a heavy toll on the company’s bottom line.

The third problem for Intel is that Advanced microdevices (AMD -3.65%) has been (excuse the necessary pun) carving its groove into legacy PC and data center processors. Even though Intel has retained most of the PC CPU market, giving up any stake to AMD means giving up precious operating cash flow at a time when its foundry segment is losing money.

While I think the pieces of the puzzle are in place for Intel to execute a turnaround — albeit one that will take several years to take shape — its days in the Dow appear numbered.

Should Nvidia replace Intel in the Dow? Not so fast…

After Nvidia’s historic 10-for-1 stock split in June, which dropped its nominal share price north of $1,000 to $106 as of this writing, it would make sense that Wall Street’s chip leader and dear AI to take Intel’s place in the Dow.

In each of the past two years, Nvidia hardware accounted for about 98 percent of GPUs shipped to data centers, according to TechInsights. Nvidia’s H100 GPU and Blackwell chip, which is expected to start shipping in the first quarter of 2025, should have no problem maintaining its computing edge over external competitors, which include the Gaudi 3 from Intel and MI300X from AMD.

Moreover, Nvidia’s CUDA software platform helps keep businesses hooked on its hardware. CUDA is the toolset that developers use to build large language models (LLMs) and get the most out of Nvidia’s AI GPUs.

But despite Nvidia’s dominance in AI, S&P Dow Jones Indices may be troublesome in handing over the keys to this AI mask.

For starters, the Dow is traditionally composed of time-tested companies. While this doesn’t mean that growth stocks aren’t allowed in the index, it does mean that the S&P Dow Jones Indices generally avoid adding companies that are merely inflated in value because of the latest trend on Wall Street.

In the past 30 years, there hasn’t been a single innovation, technology, or trend that has avoided a bubble-bursting, early-inning event. This means that investors regularly overestimate how quickly a new technology or trend will be adopted by consumers and businesses.

We are probably witnessing the same story unfold with artificial intelligence. The simple fact that most companies do not have clearly defined plans on how they will monetize AI confirms that we are in the early stages of a bubble-bursting event. S&P Dow Jones Indices is likely reluctant to add Nvidia for fear of an AI bubble taking shape.

While that’s a bit of a problem, the second problem is that Nvidia’s 10-for-1 split may have depressed the stock price too much to be considered in the Dow. Ideally, a $2.6 trillion company should have significant influence within the 128-year-old index. However, its share price of $106 would place it 23rd out of 30 components.

Image source: Getty Images.

If Intel gets the boot, this company is the most suitable replacement

Assuming Intel’s low stock price knocks it off the Dow in the not-too-distant future, the smartest addition wouldn’t be Nvidia. Instead, specialist in network solutions Broadcom (AVGO -10.36%) would make a more comprehensive addition to this iconic index.

Similar to Nvidia, Broadcom recently completed a 10-for-1 forward stock split that lowered its stock price from well over $1,500 to a more attractive $154 as of this writing. That would put Broadcom at the 20th highest-to-lowest stock price on the Dow.

More importantly, while Broadcom has undoubtedly benefited from the AI ​​revolution, its sales channels are considerably more diverse than Nvidia’s.

Over the past year, Broadcom’s AI networking solutions have gained a lot of traction. It relies on these solutions to reduce end-to-end latency in AI-accelerated data centers, as well as to maximize the computing potential of AI GPUs. But there’s a lot more to Broadcom than just AI.

It is one of the world’s leading suppliers of wireless chips and accessories used in smartphones. While some aspects of the 5G revolution have been disappointing, a steady cycle of device replacement for consumers and businesses looking to take advantage of faster download speeds has been a clear boon for Broadcom and its backlog.

Broadcom also offers a wide range of optical products and networking components for the industrial and automotive sectors, in addition to having an entrenched role in data center networking solutions.

Additionally, it has not been afraid to use acquisitions as a way to expand its ecosystem of products and services or promote cross-selling opportunities. The acquisition of Symantec in 2019 gave it a strong presence in cyber security solutions. Meanwhile, its $69 billion acquisition of VMware last November positions Broadcom as a key provider of private and hybrid solutions for businesses.

If Intel gets the boot from the Dow Jones Industrial Average, Broadcom may be the best direct replacement.