I’m no longer sure that Rolls-Royce (LSE: RR.) is still best understood as a turnaround story.
The transformation under this management team has been impressive. But I think something more interesting has happened: investors are no longer just pricing the recovery — they’re starting to price the next decade of growth.
That shift in narrative may matter more than many investors currently appreciate.
Growth beyond recovery
The reason I question whether the business remains a turnaround story is that management increasingly talks about the business in different terms.
Three years ago, investors focused on cost cuts, balance sheet repair and restoring profitability. Today, management focuses more on what comes after those goals are achieved.
What stands out from the annual report is that many long-term growth opportunities don’t rely on speculative projects. Instead, they stem from businesses it already dominates.
In Civil Aerospace, higher-margin service agreements continue replacing older contracts, while engine fleets are expected to remain in service longer than previously assumed, extending decades of aftermarket revenues.
Defence shows a similar picture. Programmes such as GCAP, AUKUS and the F-35 provide visibility into the 2030s and beyond.
The key point is that, even before assigning value to opportunities such as small modular reactors or a return to the narrow-body market, the company already has multiple avenues for earnings, cash flow and margin growth over the next decade.
Beyond SMRs
I think the more interesting question isn’t whether small modular reactors succeed. It’s whether investors are overlooking several other growth opportunities that are already emerging across the group.
Certainly, SMRs could prove highly valuable. Citi recently suggested that if the business were to capture 25%-50% of the total addressable market, it could add between 80p and 160p per share in value.
But these remain long-term projects and it’s never easy to place a value on a market that may not fully develop for decades.
When I look at Rolls-Royce today, what increasingly stands out is the growth coming from Power Systems.
As AI drives a surge in computing demand, data-centre operators are scrambling to secure reliable power supplies. In fact, Power Systems reported that demand from large data centres was one of the main reasons revenue rose 19% in 2025, while the company continues investing heavily to expand capacity. Data-centre revenue itself grew 35% during the year.
To me, this is significant because it shows the business is already benefiting from one of the biggest infrastructure themes of the decade.
Major risk
The biggest risk, in my view, is that expectations have risen much faster than the business itself.
Rolls-Royce no longer trades like a company emerging from crisis. Investors now expect management to continue delivering margin improvements, cash generation and growth across multiple divisions.
That leaves less room for disappointment. Any slowdown in Civil Aerospace, delays to major defence programmes or weaker-than-expected growth from newer opportunities such as Power Systems could cause investors to reassess the premium valuation.
In other words, the turnaround story gave investors the benefit of low expectations. The next phase of growth may not be so forgiving.
For investors comfortable paying a premium valuation, I think Rolls-Royce remains worth considering. The recovery story may be behind it, but the next phase of growth is only just beginning.
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Andrew Mackie does not hold any positions in the companies mentioned.
