Will the Top-Performing Dow Jones Stock in 2024 Outperform the S&P 500 in 2025?
Nvidia's meteoric rise continued in 2024, earning a spot in the Dow Jones Industrial Average just before year's end. Despite being in the index for a brief stint, it emerged as the best-performing Dow stock with a staggering 171.2% return, surpassing heavyweights like Walmart and American Express.
The tech giant's stock soared an astounding 818.9% between 2023 and 2024, sparking questions about its potential for further growth. Yet, there are compelling reasons why Nvidia's performance could continue outshining the market.
Nvidia's Dominance in AI
Nvidia's reign as the market leader in graphics processing units (GPUs) remained unchallenged in 2024, even with strong competition. The company announced its Blackwell architecture for generative AI on Amazon Web Services in December, cementing its presence in the AI market. Soon after, Microsoft revealed plans to invest $80 billion in AI-enabled datacenters, followed by Amazon's announcement of a massive $11 billion investment in Georgia for AI infrastructure and cloud technologies.
Nvidia's innovative approach to AI has it poised to outperform the market once more in 2025, as AI spending shows no signs of slowing down.
The stock skyrocketed to new highs in January 2025 in response to strong growth in AI in cloud and networking from a major customer, Hon Hai Precision Industry (Foxconn). The momentum could also have been fueled by anticipation of Nvidia CEO Jensen Huang’s keynote address at CES, a prominent tech conference. However, the stock dipped 6.2% the day after the event.
Wall Street analysts expect Nvidia to report solid earnings for the fourth quarter and full year of fiscal 2025, with an EPS growth rate of 50% from 2024 to 2026. This lofty expectation reflects the stock's high forward P/E ratio of 50.6. Yet, if Nvidia continues to innovate and maintain high demand for its products, it has the potential to grow into its valuation.
The Power of Earnings Growth
While Nvidia's stock may seem expensive based on near-term expectations, the long-term impact of earnings growth cannot be ignored. A consistent 20% annual return paired with 30% earnings growth could make a stock like Nvidia seem like a good value for long-term investors. As long as Nvidia continues to excel in AI and sustain product demand, it should comfortably outperform the S&P 500.
However, lulls in the tech industry or intense competition from other GPU manufacturers could lead to a temporary sell-off.
The Limits of Growth
Nvidia's enviable profitability is a result of its ability to charge premium prices for its innovative AI solutions. If customers struggle to monetize AI as expected, the pace of spending on Nvidia's products could slow, impacting the company's earnings growth.
Nonetheless, there are reasons to keep a watchful eye on Nvidia. Keeping it on a watchlist allows you to gauge whether the company's continued dominance in AI justifies its high valuation or if competition or economic weaknesses could pose a challenge in the future.
Nvidia's extraordinary growth trajectory indicates it may become the most valuable company in the world, provided it maintains its leadership in AI. Nevertheless, there is also a risk that AI spending could plateau or encounter difficulties, affecting Nvidia's ability to keep growing.
Ultimately, the best approach to investing in Nvidia is to conduct thorough research and establish clear criteria for when to purchase the stock. If you choose to delay investment and monitor the company, it's crucial to have defined reasons for any changes in your decision, focusing on business performance rather than the stock price.
Given Nvidia's impressive performance, investors might consider allocating part of their finance into Nvidia stocks for potential returns. With its significant investments in AI and its market dominance, Nvidia continues to display potential for further money-making opportunities in the investing world.
