Rolls-Royce (LSE: RR.) shares are no longer defined by the turnaround story that once dominated the investment case. With much of the recovery already reflected in the share price, attention is shifting towards what comes next. The question now is how much future growth the market is already pricing in?
The business behind the re-rating
The improvement across Rolls-Royce has become increasingly broad-based in recent years.
The transformation phase has largely been delivered, and the focus is now shifting towards the quality and durability of the earnings base rather than repair.
Civil Aerospace continues to benefit from stronger aftermarket performance and rising engine utilisation. Defence is seeing steady growth, supported by higher global military spending and long-term programme visibility. Power Systems has also moved meaningfully higher in profitability following restructuring and improved execution across its core operations.
But the most important driver, in my view, sits in the aftermarket business.
Earnings profile
The group’s long-term service agreements are becoming a far more significant part of the earnings profile. Margins are improving. Cash generation is also increasing as engines cycle through maintenance programmes.
These contracts are long-duration in nature. They are increasingly supported by better pricing, improved engine performance and higher utilisation rates.
Management has also highlighted that much of the cash benefit from these agreements is still ahead rather than behind the business. That reinforces the visibility of future earnings rather than just current results.
Taken together, this shifts the investment case away from a simple recovery narrative. It becomes something more durable. A business increasingly driven by high-margin, long-life service revenue streams rather than one-off cyclical gains.
Long-term growth
Beyond today’s business, there is a much longer-term question that is increasingly difficult to ignore: how the world will power the next phase of AI-driven demand.
Power consumption from data centres is rising rapidly, and traditional energy sources are struggling to keep pace. Renewables play a growing role, but intermittency remains a constraint. Natural gas has filled much of the gap, but it’s not a perfect long-term solution for the scale of demand being discussed.
This is why small modular reactors (SMRs) are increasingly being viewed as a potential structural answer. In theory, they offer reliable, low-carbon baseload power at a scale that could suit large industrial users such as hyperscale data centres.
Rolls-Royce is one of the better-known players in this space through its SMR programme. The concept is straightforward: replicate a standardised nuclear design, manufacture it in modules, and scale deployment more efficiently than traditional nuclear builds.
But therein lies one of the most significant long-term risks for the company.
SMRs are still unproven at commercial scale. Regulatory approval timelines remain long, and competition is increasing. Even if demand for clean baseload power accelerates, it’s not yet clear how much of that opportunity Rolls-Royce will ultimately capture.
For investors, SMRs represent genuine long-term optionality, but also execution risk and timing uncertainty in equal measure. That’s why I remain cautious about attaching too much value to them today.
Even so, given the strength of Rolls-Royce’s core business, I still see the stock as one investors may wish to consider.
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Andrew Mackie does not hold any positions in the companies mentioned.
