Could AI lift the Rolls-Royce share price by 93% and make the group the UK’s number 1?
On Wednesday (13 August), the Rolls-Royce (LSE:RR.) share price fell 1.8% despite Tufan Erginbilgiç, the aerospace and defence groupâs chief executive, telling the BBC that artificial intelligence (AI) powered by small modular reactors (SMRs) could make it the UKâs most valuable listed company.
But SMRs â factory-built nuclear power stations â are still being developed. Therefore, Erginbilgiçâs looking many years ahead. Thatâs probably why investors didnât seem that excited. However, based on current (15 August) valuations, for Rolls-Royce to become the FTSEâs biggest company today, its market-cap would need to be 93% higher.
Is this possible?
The next big thing
Everyone seems to be jumping on the AI bandwagon at the moment. This appears to be driven by predictions that the technology could bring about a fourth industrial revolution.
Like all businesses, AI will probably impact every aspect of the company’s operations. But the boss of Rolls-Royce believes there will be a more significant benefit from the anticipated increase in the demand for electricity needed to power the next generation of energy-hungry AI data centres.
Some numbers
Presently, the groupâs shares trade on 29.2 times its forecast 2028 earnings. On this basis, to achieve a valuation 93% higher, it would need to generate an additional £3bn of profit a year.
Given that each SMR is expected to cost over £2bn and that 400 might be needed by 2050, this seems achievable. In addition to the upfront profit, there will also be the opportunity to generate ongoing maintenance revenue. Erginbilgiç claims“there is no private company in the world with the nuclear capability we have“.
However, there are presently no SMRs anywhere in the world generating electricity. The technology remains unproven and — like many nuclear energy projects — may ultimately prove more expensive than initially anticipated.
Personally, I think it could be at least a decade before thereâs sufficient visibility on the viability of the technology to have a significant impact on the groupâs stock market valuation.
Doing what it does best
More immediately, a move to start fitting its engines to narrow-body aircraft could be more lucrative. This marketâs estimated to be nine times bigger than the wide-body equivalent in which Rolls-Royce is believed to be the market leader.
From 2024-2028, analysts are expecting an average annual increase of 13% in operating profit from its civil aerospace division.
If this were to continue, its engine business could generate the £3bn of additional earnings needed to propel the group to the top of the FTSE 100 by the middle of the next decade. And this ignores any additional contribution from its other divisions.
However, there are no guarantees. The pandemic showed how the aviation industry can be vulnerable. And problems with the groupâs engines â as experienced by Cathay Pacific Airways in 2024 — have the potential to impact earnings and dent confidence in the brand.
Over the next 10 years, I can see Rolls-Royce being worth much more than it is today. But the Footsieâs other larger businesses should also grow over this period.
Whether the group becomes the UKâs number one doesnât really matter. As long as it continues to improve its bottom line â and I think there are plenty of reasons to suggest it will â its share price should keep rising. For this reason, investors could consider the stock.
The post Could AI lift the Rolls-Royce share price by 93% and make the group the UK’s number 1? appeared first on The Motley Fool UK.
Should you invest £1,000 in Rolls Royce right now?
When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets.
And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Rolls Royce made the list?
More reading
- Why is everyone talking about Rolls-Royce shares?
- The hidden risks behind the Rolls-Royce share price rally (and why they may not matter)
- Rolls-Royce could become the largest company on the London Stock Exchange, according to CEO Tufan Erginbilgiç
- Can powering AI push Rolls-Royce shares as high as 2,046p?
- This boring FTSE 100 stock is forecast to grow twice as fast as the Rolls-Royce share price!
James Beard has positions in Rolls-Royce Plc. The Motley Fool UK has recommended Rolls-Royce Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
