4 reasons the Rolls-Royce share price might be headed to £24

The Rolls-Royce (LSE: RR.) share price has developed an impressive knack of doubling in value (or close) in periods of 12 months lately. Could the stock achieve yet another 100% increase in the near future? The chances, in my opinion, come down to four possible reasons that could propel the shares to surge yet higher:

• 1) A swift resolution to the awful goings on in the Middle East
• 2) A continuation of the seemingly unstoppable rise of artificial intelligence
• 3) NATO countries following through on proposed increases in defence spending
• 4) More progress on the building out of SMRs (mini nuclear power stations)

Let’s take a quick look at each of these and how likely they are.

For the future

The big news, of course, is the war in Iran. While Rolls-Royce does draw revenue from defence sales, this awful conflict is by no means a boost for the share price. The shares are down 10% since the start of March.

The primary reason is that its biggest division, Civil Aerospace, draws its sales from the maintenance of engines, which is measured by flying hours. More planes in the sky? More earnings. It’s anyone’s guess how long the airspace in the Middle East will be dangerous and restricted, but I think we can all hope it’s not much longer.

The second point is still something of a bit unknown, so here’s a quick refresher. Rolls-Royce is playing a vital role in backup energy generation for AI data centres. Their power systems – like diesel generators for example – are the perfect failsafe to keep these complex systems running if the standard power goes out.

Rolls-Royce has been inking deals with Nvidia in this area already. With the hundreds of billions in capex being spent on AI, I wouldn’t be surprised to see a few more deals in the future.

Possibilities

The third point concerns Rolls-Royce’s second-largest division of Defence. Its engines already play a key role in some of the world’s most advanced military aircraft, and there could be a lot more where that came from. NATO countries are proposing huge bumps to defence budgets, up to two or three times in some cases.

The fly in the ointment might be meeting those big spending commitments at a time when many developed countries are spiralling into eye-watering levels of debt.

Fourthly, we have the upcoming construction of SMRs. These easy(ish) to build nuclear power stations have already received orders – one contract notably coming from the UK by way of Great British Energy – and have a possibility of being the clean energy source of the future.

The downside is they’re mostly unproven technology; only a couple are being used anywhere in the world. So some meaningful progress on their viability could take Rolls-Royce shares to another level.

As we can see, there is something of a mixed bag in all that. A £24 share price is a long way off from here, but on the whole, I’m optimistic. I think this is a stock worth considering.

The post 4 reasons the Rolls-Royce share price might be headed to £24 appeared first on The Motley Fool UK.

More reading

• How much might £10,000 in Rolls-Royce shares soon be worth? Let’s ask the experts
• These 5 red flags mean I’m avoiding Rolls-Royce shares like the plague!
• Stocks and Shares ISA investors should prepare for an ugly stock market crash
• As Rolls-Royce buys its own shares, should I buy more too?
• Is the party finally over for Rolls-Royce shares?

John Fieldsend has positions in Rolls-Royce Plc. The Motley Fool UK has recommended Nvidia 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.

See author's posts