Investors have been dazzled by Rolls-Royce (LSE: RR) shares ever since they took off after the pandemic. That’s hardly surprising, with the stock up an astonishing 1,220% in five years. That would have turned a £10,000 investment into a staggering £132,000.
That’s wonderful for investors who got in early but a problem for latecomers. Have they left it too late?
The answer is brutal and obvious. Yes. Rolls-Royce is now worth £110bn, and simply can’t keep growing at the same breakneck pace. Attention has drifted away, while US tech stocks have swung back into favour.
Is SpaceX just more exciting?
Much of that was driven by another potential high-growth opportunity, Elon Musk’s Space Exploration Technologies Corporation, or SpaceX (NASDAQ: SPCX). It’s dominated headlines either side of its record-breaking IPO on 12 June.
The share price was set at $135 but quickly rocketed past $200. As many writers on The Twelfth Magpie warned, the shares probably overshot on all the hype. And so it proved. The SpaceX share price fell 13% last week, although it’s still above its launch price at around $153.
Will it fall further? Maybe not. A wall of money is still waiting to go into SpaceX from passive exchange traded funds.
Personally, I think investors should approach with caution today. SpaceX is pouring money into its artificial intelligence arm xAI and posted a $4bn loss in the first quarter of 2206. Is AI a bubble or a generational opportunity? Right now, we just don’t know.
Rolls-Royce was riding high earlier this year when its price-to-earnings (P/E) ratio hit a dizzying 65. I was urging caution then too.
The shares slumped almost 20% in March, as the Iran war threatened international travel, especially in the Middle East. That was bad news because aircraft engines still generate around half of group revenues. Its Defence arm should have benefited, but that sector has also cooled after a strong run.
While SpaceX has streaked across the investment firmament, the Rolls-Royce share price has clicked back into gear. It’s up 22% in the last three months. The P/E has retreated to 46, but that’s still expensive. This is a company that has repeatedly set ambitious targets under CEO Tufan Erginbilgic, and usually matched or smashed them. It’s on course to post profits of up to £4.2bn this year.
So what do the experts say?
Consensus analyst forecasts put Rolls-Royce on a one-year share price target of 1,438p. If correct, that’s modest growth of 2.5% from today’s 1,406p. However, 16 out of 20 analysts still label it a Strong Buy, with not a single Sell recommendation.
By contrast, SpaceX forecasts look far more exciting, with a target price of 242.5p. If correct, that’s growth of 58% from today’s 153p. Five out of 11 brokers name it a Strong Buy. Two say Sell.
Forecasts aren’t guaranteed. Some SpaceX predictions may reflect the excitement around the IPO, while Rolls-Royce targets may need updating after its latest rise.
My view? Both are stunning companies but investors considering them should approach with caution. There’s just a little too much hype and hope baked in
Should you invest £5,000 in Rolls-Royce Plc right now?
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Harvey Jones owns shares in Rolls-Royce Holdings and the Scottish Mortgage Investment Trust.
