Google parent Alphabet (GOOGL) will replace Verizon Communications (VZ) in the Dow Jones Industrial Average at the opening of trading on Monday, June 29, making the 30-stock bastion of blue chip companies increasingly exposed to all things digital.
Alphabet is best known to consumers as the operator of Google and YouTube, but as S&P Global notes, GOOGL’s diversified portfolio spans advertising, cloud infrastructure, artificial intelligence, hardware, self-driving cars and healthcare technology.
“Adding Alphabet will broaden and strengthen the DJIA’s exposure to these dynamic areas of the U.S. economy,” S&P Global said in a press release. “Its larger market capitalization and share price, together with the breadth of its businesses, make it a more representative Communication Services constituent in the DJIA.”
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The move refers to Alphabet’s Class A shares. The Class C shares (GOOG) will not be in the Dow.
Telecom giant Verizon, which has been in the Dow since 1984, sounds like a pretty poky business by comparison. Apple (AAPL) replaced AT&T (T) in the Dow in 2015. You may notice a pattern here.
S&P Global notes that Verizon represents only one-half of one percentage point of the DJIA due to its low share price. The Dow is a price-weighted index, and thus “persistently lower-priced stocks have an immaterial impact on the index,” S&P Global said.
As much interest as such events generate, being tapped for the Dow is more symbolic than material. After all, the S&P 500 is the main benchmark for U.S. equity performance. That’s why the total amount of money passively tracking the index comes to around $12 trillion.
For example, the largest exchange-traded fund (ETF) in the world, the Vanguard S&P 500 ETF (VOO), has more than $1.7 trillion in assets under management alone. A comparable product for the DJIA, the State Street SPDR Dow Jones Industrial Average ETF Trust (DIA), holds just $43 billion in assets under management.
Lastly, as noted above, the Dow is weighted by price rather than by market cap. Although GOOGL has an outsized influence on the movements of cap-weighted benchmarks, such as the S&P 500, Nasdaq Composite and Nasdaq-100, at current prices, GOOGL will be as material to the DJIA as, roughly, Sherwin-Williams (SHW).
Nevertheless, the blue-chip average will now include many of the biggest names among tech and communication services stocks: Apple, Amazon.com (AMZN), Nvidia (NVDA) and Microsoft (MSFT), as well as Salesforce (CRM), Cisco Systems (CSCO) and International Business Machines (IBM).
Is GOOGL stock a Buy?
GOOGL joining the Dow is not in and of itself a reason to buy the Magnificent 7 stock. Nothing about its fundamentals has changed. And while shares are currently in a 15% drawdown from their May peak, Wall Street remains bullish.
Of the 63 analysts covering GOOGL surveyed by S&P Global Market Intelligence, 42 rate it at Strong Buy, 14 say Buy and seven call it a Hold. That works out to a consensus recommendation of Strong Buy.
The Street’s investment case for GOOGL comes down to AI. (Duh.)
“Alphabet remains at a minimum competitive, if not a leader, in the development of generative AI, the rapidly developing and perhaps disruptive new computing paradigm,” writes Argus Research analyst Joseph Bonner, who rates shares at Buy. “We continue to like Alphabet’s underlying businesses and believe that GOOGL shares are attractively valued given the company’s growth runway.”
The bottom line: If you liked GOOGL before its accession to the bluest of blue-chip clubs, there’s no reason to change your mind. But don’t buy it just because it’s a better fit for the Dow Industrials than Verizon.