With just 30 components, the Dow Jones Industrial Average doesn't have the breadth of the S&P 500 or the Nasdaq Composite. But investors still turn to the time-tested index to get a pulse on the market.
That's because the 30 components in the Dow are leading companies that act as representatives for their respective industries.
To reflect the changing composition of the market's constituents, the Dow has gradually become more tech focused. Microsoft and Intel (NASDAQ: INTC) were added in 1999. Apple joined in 2015. Salesforce was added in 2020. In February, Amazon replaced Walgreens Boots Alliance. That means that three tech-focused stocks have been added to the Dow within the last nine years.
With the pace of change accelerating, I think it's reasonable to assume the other four "Magnificent Seven" stocks could be in the Dow by 2030. Here's how it could happen, and the companies that could be replaced.
Image source: Getty Images.
Alphabet for IBM
Alphabet(NASDAQ: GOOG)(NASDAQ: GOOGL) has been one of the most valuable companies in the market for some time. But it was essentially ineligible for inclusion in the Dow until its stock split in July 2022.
Stock splits don't matter in the S&P 500 or the Nasdaq Composite because they are market cap-weighted. But the Dow is price-weighted, so the arbitrary price of stock determines its weight in the Dow. The highest-price Dow stock right now is UnitedHealth Group at around $476 per share, the lowest is Verizon at $39.50, and the median is around $173.
Amazon was a perfect addition to the Dow because it is an industry-leading company and it is right around the median price. Amazon split its stock just one month before Alphabet in June 2022.
Alphabet is around $135 a share, so it would have a below-average weighting. I think that works in Alphabet's favor so as not to make the index too tech-heavy. In fact, replacing International Business Machines(NYSE: IBM), which has a stock price around $195, would reduce tech's weight in the Dow and set the stage for future Magnificent Seven additions.
Alphabet and IBM have some overlap, particularly with their cloud business units. But Alphabet is an overall stronger business than IBM and is a better representative of the economy.
The communications sector makes up just 2.5% of the Dow, compared to 88.% in the S&P 500, while the three most valuable communications companies are Alphabet, Meta Platforms(NASDAQ: META), and Netflix. I believe, the Dow should better represent the importance of search, social media, and digital advertising. Alphabet checks those boxes through Google and YouTube (often considered a form of social media). Amazon Web Services, Microsoft Azure, and Google Cloud are the three largest cloud infrastructure players, so adding Alphabet to the list makes sense.
Meta Platforms for Verizon
Sticking with the theme of better representing the communications sector, let's go ahead and boot Verizon in favor of Meta Platforms. At a price below $40 a share, Verizon is currently the lowest-weighted stock in the Dow. Meta is around $505 a share. If added, it would be the most valuable company in the index. But it would be much more reasonable if Meta issued a 3-for-1 or 4-for-1 stock split.
Meta Platforms dominate social media and digital advertising. Facebook, Instagram, and WhatsApp offer arguably the most valuable digital real estate for advertisers worldwide. Meta Platforms spends a ton of money on research and development in its Reality Labs segment, giving the Dow exposure to virtual reality and other themes still in their infancy.
Nvidia for Intel
This is probably the easiest swap on this list. It's been 25 years since Intel was added to the Dow. And yet it still hasn't reached the sky-high price it hit during the Dot-com bust. In fact, Intel isn't even in the top-five most valuable semiconductor companies.
Meanwhile, Nvidia(NASDAQ: NVDA) is the clear semiconductor industry leader. It is also the driver behind artificial intelligence (AI). If AI becomes as big as, say, social media or mobile phones, then the Dow should have an AI stock. Nvidia can fill that void and replace another chip stock in the process.
Nvidia would have to issue a 5-for-1 stock split at a minimum. But there's already talk that could happen. At just $44 a share, Intel is the second-lowest weighted stock in the Dow. In order to not tip the balance too much, it would be great if Nvidia issued a 10-for-1 stock split to give the stock a price below $100.
Tesla for Dow
General Motors was famously removed from the Dow when it filed for Chapter 11 bankruptcy in 2009. Since then, the auto industry hasn't been represented in the Dow.
Tesla(NASDAQ: TSLA) isn't in the Dow right now, but it could be added in the years to come. For that to happen, electric vehicles (EVs) must make up a far higher percentage of cars sold.
In September 2022, the International Energy Agency famously predicted that EVs would make up 60% of vehicles sold globally by 2030. If Tesla continues to grow and stays the market leader, it could deserve a spot in the Dow, especially considering the index's constituents tend to be leaders on the global stage, and there is no other American car company that currently has that potential.
The decision to replace commodity chemical company Dow(NYSE: DOW) is a bit nuanced. Note that Dow -- the chemical company -- has nothing to do with the Dow Jones Industrial Average, but it is a component of the index (confusing, I know).
Tesla for Dow is the least clean swap on this list. Dow has a price per share around just $57. It is the fourth-lowest-weighted stock in the index. There's nothing particularly wrong with the company, and it's good to represent the basic materials sector. But Tesla has become a bit of a materials company in its own right, with a complicated supply chain for resourcing inputs to make batteries and the rest of its products. Its renewables exposure is also unique and something that isn't really covered in the Dow Jones Industrial Average.
Tesla could represent the auto industry, renewable energy, and other ESG themes. There are good arguments for Tesla replacing a different stock other than Dow. But if EVs continue to take market share and Tesla remains a leader, it could find its way into the Dow one way or another.
A changing economy
The Dow Jones hasn't been an "industrial average" for some time. Even today, the industrial sector makes up just 14.2% of the index. Rather, the Dow acts as a house of representatives for the broader market.
The Magnificent Seven are leaders in industries that should continue to grow for decades to come. They represent a great deal of value in the market.
The exact swaps and timing of stock splits will vary, but I think there's a very good chance that the Dow will look much different in 2030 than it does today.
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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. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool's board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Daniel Foelber has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet, Amazon, Apple, Meta Platforms, Microsoft, Netflix, Nvidia, Salesforce, and Tesla. The Motley Fool recommends General Motors, Intel, International Business Machines, UnitedHealth Group, and Verizon Communications and recommends the following options: long January 2023 $57.50 calls on Intel, long January 2025 $25 calls on General Motors, long January 2025 $45 calls on Intel, long January 2026 $395 calls on Microsoft, short January 2026 $405 calls on Microsoft, and short May 2024 $47 calls on Intel. The Motley Fool has a disclosure policy.
