3 risks to the Rolls-Royce share price?
The almost exponential increase in the Rolls-Royce Holdings (LSE:RR.) share price over the past three years or so has been well documented. And a number of analysts are predicting thereâs more to come. But is there a chance that investors (myself included) are getting carried away? Here are three reasons why the rally might not last.
| Year | Share price change (%) |
|---|---|
| 2021 | +10.5 |
| 2022 | -24.2 |
| 2023 | +221.6 |
| 2024 | +89.7 |
| 2025 | +102.3 |
1. Will they work?
Like many others, the groupâs been developing small modular reactors (SMRs). These factory-built mini nuclear reactors are intended to be quicker and cheaper to construct than larger power stations. Indeed, if all goes to plan, Rolls-Royce hopes to be earning revenue from its first SMR before Hinkley Point C (construction started in 2016) is fully operational.
But is there a risk that the technology might not be commercially viable? According to the OECD, there are currently 127 designs requiring five different cooling methods and over a dozen fuel types. Who knows if Rolls-Royce’s technology will work?
Itâs hard to know how much value investors are placing on this programme being successful. But one analyst reckons it could be worth up to 40p a share.
2. Trouble overhead
The conflict in Iran is a reminder how vulnerable the group is to the grounding of aircraft with airlines paying on a per hour basis for engines. Tens of thousands of flights have been cancelled and although itâs impossible to tell how many of these would have been powered by Rolls-Royceâs engines, Iâm sure thereâs been some significant loss of revenue to the group.
Flying hours could also be affected by an economic slowdown as well as reduced demand due to higher ticket prices brought on by inflated fuel costs.
3. Over-priced?
Finally, itâs sometimes overlooked that Rolls-Royce has a stock market valuation thatâs currently (30 March) around 35 times greater than its 31 December 2025 balance sheet value (assets less liabilities) of £2.7bn. Although not necessarily a problem in itself this could be interpreted as a sign that the groupâs hugely overvalued.
When a share price has been on a strong rally, it can be particularly sensitive to bad news. Often, investors will over-react to the first sign of trouble. For example, any indication that the groupâs SMR programme isnât going to live up to expectations — or if there’s a downturn in global air passenger numbers — there could be a sharp pullback.
My view
However, I remain optimistic.
The groupâs modular reactors are attracting interest from the UK, Czech Republic, and Sweden. And even if its civil aviation business does struggle a bit, the group always has its defence and power systems divisions to fall back on.
Looking further ahead, Rolls-Royce wants to return to the narrowbody aircraft engine market. Itâs estimated there are twice as many smaller planes in the world as there are larger ones. The potential is therefore huge.
And encouragingly, when releasing its 2025 results, the group significantly upgraded its mid-term earnings and cash forecasts. All in all, I think the groupâs in good financial shape and has a sufficiently diversified business model to help compensate should one part of the group start to encounter difficulties.
For these reasons, I plan to hold on to my shares. And the recent pullback in the group’s share price could be an opportunity for other long-term investors to consider taking a stake.
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James Beard has positions in Rolls-Royce Plc. The Motley Fool UK has recommended London Stock Exchange Group Plc 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.
