Lately, the narrative around the Rolls-Royce (LSE: RR) share price has been that this is probably as good as it gets for now. We’ve had our fun, time to hunker down. But are we underestimating it?
The FTSE 100 engineering powerhouse is the UK’s post-pandemic blue-chip superstar. It shares are up 1,116% over five years. That would have turned a £10,000 investment into £121,600. Which shows how just one successful stock can transform a retirement. If you get in early enough.
That kind of growth cannot continue forever. When the market cap hit £100bn, investors became wary. Especially with the price-to-earnings ratio hitting a dizzying 65.
Can this FTSE 100 stock surprise us again?
But Rolls-Royce shares are on the move again. They’re up 13% in the last month, and the market cap is now £112bn. At the same time, that P/E has retreated to 44. Still very high, but not quite as menacing as before. What’s going on?
US investors wouldn’t be tip-toeing around this one. Witness the excitement about high-fliers Tesla, Nvidia and, of course, SpaceX, the latter of which went public on Friday (12 June).
Elon Musk’s intra-planetary vehicle has dominated the headlines. Much of the commentary over here, including from me, has focused on how the stock looks overpriced given the profits it makes (or rather, doesn’t). That didn’t stop it from flying out of the blocks and jumping another 16.6% on Monday.
Americans dream big. Britons are more cautious. Hard experience I suppose. But are we in danger of underestimating Rolls-Royce as a result?
Yes it’s flown very high, yes it’s expensive, and yes, it’s fortunate that its civil aerospace, defence and power systems divisions are all in a sweet spot right now. But Rolls also has a stellar CEO in Tufan Erginbilgic and a massive new growth opportunity in small modular reactors (SMRs), or mini-nukes.
It’s been securing contracts in the UK and Czech Republic, and we’ve just learned it’s struck a deal to develop SMRs capable of powering factories, data centres and military bases in Japan. Swiftly followed by news that Sweden is keen too.
Are the shares worth the money?
There are still huge challenges. SMR tech is still unproven, reactors aren’t cheap to build at £2.2bn a pop, and Rolls faces tough competition to commercialise the tech. But the prize is huge. Given the massive energy demands of AI data centres, Erginbilgic estimates the global SMR market will be worth more than $1trn. He claims SMR deals have the “potential” to make Rolls-Royce the most valuable company in the UK. That would see its market cap double at least.
Other divisions could some unstuck. Its aircraft engines have been dogged by technical issues, and United Airlines just accused Rolls of “gouging” carriers. Peace in Iran and Ukraine, while welcome, could hit defence demand. AI could prove a bubble and data centre rollout may stall. But I still think Rolls-Royce shares are worth considering today. Even at this price.
Should you invest £5,000 in Rolls-Royce Plc right now?
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Harvey Jones owns shares in Nvidia and Rolls-Royce Holdings.
