As the euphoria pertaining to artificial intelligence has increased in recent years, the 128-year-old Dow Jones Industrial Average index replaced the shares of Intel Corp. INTC with Nvidia Corp. NVDA in its index. 

The shares of Santa Clara, California-based company, Nvidia Corp have jumped nearly 204% in the past year, whereas Intel Corp (INTC) shares have plummeted nearly 32% in the same period. 

What Happened: Nvidia Corp has emerged as the biggest winner in Wall Street’s AI-fueled rally. By Friday’s market close, Nvidia’s market cap reached $3.62 trillion, surpassing Apple Inc.’s AAPL valuation of $3.431 trillion, marking a significant milestone for the chipmaker as it races ahead amid surging demand for AI technologies.

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“Nvidia is a well-run company and joining the Dow demonstrates just how powerful its rally has been in recent years after it was at the right place at the right time when no one else was,” said Scott Colyer, chief executive at Advisors Asset Management, according to Bloomberg.

Some analysts also believe that Intel Corp’s business, which was added to Dow in 1999, has been under pressure. The company has budgeted spending, cut jobs and stopped investor payouts. “Intel has lagged in a huge way,” Adam Sarhan, founder of 50 Park Investments told Bloomberg.

“Now, the Dow is evolving. You don’t want to see stocks that were there 30 years ago. You want to see what’s the strongest that survive today.”

Why It Matters: The Dow Jones Industrial Average is a price-weighted index based on 30 U.S. stocks, which first started as an index of 12 industrial stocks. The index has been subject to criticism for its limited scope, particularly its underrepresentation of technology stocks, a sector that has exhibited substantial growth in recent times.

One disadvantage of a price-weighted index is that a given percentage change in the price of a higher-priced stock has a greater impact on the index’s value than does an equal percentage change in the price of a lower-priced stock. Put another way, higher-priced stocks have more weight in the calculation of a price-weighted index.

Dow’s price-weighted methodology is troublesome for technology companies that abstain from splits and have shares trading above $1,000. Nvidia has split its stock two times in the past four years, the most recent of which was a 10-for-1 swap that took effect in June, which has made it easier for Dow to include the shares in its gauge.

A few analysts are still weary of Nvidia’s rally and believe that the chipmaker lacks a predictable earnings stream. Popularly, dubbed as the Warren Buffet of the U.K., Terry Smith, the founder and chief executive officer of Fundsmith Equity has said in a Nov. 5 interview in Tokyo that “I’m not confident that we know what the future of AI is because there are almost no applications people are paying for. Will they be willing to pay on a sufficient scale and a sufficient price to justify this? Because if not, the suppliers of the chips are going to have a problem,” Smith added. 

The $32 billion (GBP 25 billion) Fundsmith Equity portfolio, which prioritizes growth stocks, holds stakes in major U.S. tech companies like Apple Inc, Meta Platforms, Inc., and Microsoft Corp. However, Smith opted out of investing in Nvidia, citing unpredictability in its future outlook.

Smith’s Fundsmith Equity Fund underperformed this year, returning 9% in dollar terms compared to the MSCI World Index’s nearly 20% gain. Smith attributed this to the concentration of performance in a few stocks and the increasing popularity of index funds.

Price Action: Charting back to five-year-old data, Nvidia Corp has surged nearly 2,792% and Intel Corp is down by approximately 55%. Nvidia Corp shares ended the trading day at $147.63 per share, whereas, Intel Corp was at $26.20 per share as of Friday’s close.

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