Up 840% in 5 years, Rolls-Royce shares might still be 20% undervalued
The old investor saying that “the trend is your friend until the bend at the end” might be apt for Rolls-Royce Holdings‘ (LSE: RR.) shares right now.
Working out a rational long-term valuation hasn’t been easy these past five years. Earnings growth forecasts have been strengthening. But along with that, the share price climb has pushed up the price-to-earnings (P/E) ratio.
We’re looking at a forecast multiple above 38 for the current year. That’s around two and a half times the long-term FTSE 100 average. And unlike the 4% or so dividend yield we might expect from the index, there’s just 0.7% on the cards from Rolls.
Still, investors who didn’t attempt the hard calculations and just followed the momentum could have made a pretty penny.
Crowd madness, or wisdom?
Extraordinary Popular Delusions and the Madness of Crowds, a book by Charles Mackay published in 1841, covered the South Sea Bubble as an example of where crowd madness can lead.
Stock in the South Sea Company followed one of the best known boom-and-busts in history. It even drew in Sir Isaac Newton, who had around £22,000 in South Sea stock in 1722 — worth £4.8m in 2025 money.
How much he lost isn’t known. But when asked about the soaring stock price he allegedly replied: “I can calculate the movement of the stars, but not the madness of men.” It was mostly men who did reckless things back then — I don’t think women were allowed to be that crazy.
What about Amazon?
Then I look at the most dramatic burst of my lifetime, the dotcom bubble. Amazon had been soaring by the end of 1999, but in less than two years its price crashed by an almighty 95%. It was just a bookseller, right? And we wouldn’t want to have bought on the eve of the resounding pop.
Well, anyone who did and held firm could today could be up around 5,500%. From the peak of the bubble. Short-term trends say little about long-term prospects.
Broker consensus
The Rolls-Royce analyst Buy consensus is one of the strongest I can see. There’s a lone Sell call out there. But 75% of tipsters rate Rolls a Buy — with a few Holds in the mix.
The highest price target is at 1,150p with today’s price 20% below it. As a caution, the average target price is slightly below where it is now. That’s not necessarily anything to worry about, as it might just suggest long-term value with short-term volatility expected.
So what should we do, avoid the madness of the crowd, or follow its wisdom? That question has vexed some of the best minds in history.
Still good value?
Forecasts show the Rolls P/E declining to 28 by 2027. If the outlook still looks strong then — and I rate the chances high that it will — investors could do well to consider buying Rolls-Royce shares today.
My trouble is that I’ve followed growth stock trends for decades. They’ve all hit that bend, sooner or later. Every single one of them. I’ll keep watching from the sidelines.
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More reading
- Can Rolls-Royce shares soar further? Here are 3 things driving growth
- The Rolls-Royce share price has hit a critical point
- The Rolls-Royce share price is close to an all-time record. Could it still be a bargain?
- 5 trends that could make more money for Rolls-Royce shareholders
- Despite hitting a record high, analysts reckon Rolls-Royce shares are still undervalued
John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Alan Oscroft has no position in any of the shares mentioned. The Motley Fool UK has recommended Amazon and 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.
