The last five years have been very good for shareholders Nvidia (NASDAQ: NVDA). The chip giant’s share price has risen 1,225% at that time. That’s impressive by any measure. In comparison with Greggs (LSE: GRG), surprisingly. Greggs shares plunged. The stock price is 24% lower today than it was five years ago.
But as investors we don’t have a time machine that allows us to go back and invest in 2021.
Looking at the market todaywould owning Gregs shares give my portfolio more growth potential over the next five years than putting the same amount in Nvidia?
It’s not as common sense as it may sound.
Nvidia: a smart, highly anticipated company with its own value
Nvidia’s soaring share price and resulting $4.4trn market capitalization (highest in the world) is the story of “right place, right time“.
Growing demand for chips driven by rising AI spending has seen sales and profits explode for Nvidia, thanks to its proprietary designs, deep customer relationships, and high-end capabilities.
What has motivated Nvidia in recent years can continue to do so. In that case, big stock price gains could be on the cards over the next five years.
But I feel that the risk here is great.
It is unclear whether AI chip demand will remain at its current level, let alone continue to grow.
If demand remains high, it will also encourage competitors to try to develop cheaper alternatives to Nvidia’s expensive products, which could hurt revenues and profits.
A stock price of 45 times earnings leaves little if any margin for the company’s underperformance.
Greggs: a great, underrated company with its value
If Nvidia is the rabbit, then Greggs is the tortoise.
I FTSE 250 the sausage roll specialist can be seen as sitting on the opposite side of the tech spectrum from Nvidia. In fairness, however, it has used technology in the form of a customer app to try and grow its business.
Greggs’ share has fallen, in part because investors fear slowing growth. But it is still growing.
Now, that growth is unlike what we’ve seen from Nvidia.
But I think it can go on, albeit slowly and steadily. The high-end chip market can see a sudden drop in customer demand at short notice. I don’t see that happening with steak biscuits or yum yums.
Gregs faces dangers. Cost increases such as higher National Insurance contributions can eat into profits.
But on balance I think the risk of a drop in demand or a temporary increase in serious competition is much greater for Nvidia than for a high street chain.
Greggs’ price-to-earnings ratio of 11 looks cheap to me.
Chips or pies? I’m backing one horse in this impossible race!
I believe Greggs doesn’t have to do much to deserve a higher price in the coming years: mainly to prove his business can continue to grow steadily.
Nvidia has to do more to justify its current share price, on the contrary: it needs to maintain its extraordinary growth story.
Even before taking into account Greggs’ annual yield of 4.3% (compared to Nvidia’s 0.02% yield), I think Greggs stock could have a lot of potential over the next five years. I am the owner.
