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Rolls-Royce (LSE: RR) shares skyrocketed in autumn 2022 and have continued to soar since then, up nearly 500% over the past two years. Who needs Nvidia anyway?
I usually approach momentum stocks with caution, expecting them to eventually stall. Yet, surprisingly, Rolls-Royce’s share price remained robust throughout 2024.
Beginning the year at roughly 297p, it has now climbed to about 587p—a remarkable increase of 97.6%. There was no dividend during this time as it was suspended during the pandemic, but it is anticipated to return this year.
This FTSE 100 stock’s a world beater
If I had the courage to invest my full £20,000 Stocks and Shares ISA allowance in the FTSE 100 engineering leader at the start of 2024, my investment would have grown to an impressive £39,520 today. This illustrates the potential rewards of investing in individual stocks as opposed to merely following an index. However, the risks involved are correspondingly higher.
I won’t even calculate the returns from investing £20,000 in Rolls-Royce two years ago, as that would only make me regretful.
While I do hold this stock and have benefited from its rise, the pressing question remains: what’s next for Rolls-Royce?
One thing I can say with confidence is that the share price won’t soar another 100% or 500%. CEO Tufan Erginbilgic has had a transformative impact, but significant challenges lie ahead. With shares trading at 42.79 times trailing earnings, he must navigate carefully without any missteps. Rolls-Royce’s current pricing suggests expectations for growth that it must fulfill.
Erginbilgic deserves praise for his hard work in shifting the company culture, enhancing operational efficiency, cutting costs, and improving profit margins. He also benefited from joining the firm just before the post-Covid rebound in global aviation, which surged demand for the company’s jet engines and service offerings.
Importantly, Rolls-Royce is not solely about aircraft engines. The third-quarter results released on November 7 showed strong demand across all three divisions: civil aerospace, defence, and power systems.
Growth will be a lot slower
The company is also venturing into green technologies, including small modular nuclear reactors and sustainable aviation fuels. If successful, these initiatives could add long-term value, although this is by no means certain.
An economic slowdown, geopolitical tensions, and supply chain issues could derail Rolls-Royce’s plans in 2025. The Trent 1000 engines remain contentious, and US competitor Boeing serves as a cautionary tale of how technical difficulties can impact a company’s stock performance.
The 12 analysts providing one-year stock price forecasts for Rolls-Royce have a median target of 609.6p. If accurate, this represents a modest increase of just 4.2% from current levels. This could feel underwhelming after the recent excitement. The shares might perform better if a broader economic recovery occurs, but that situation remains uncertain.
Despite this, eight analysts recommend the stock as a Strong Buy, with two more advising it as a Buy, while only one analyst suggests a Strong Sell.
Anyone considering an investment in this stock must recognize that they may have missed the peak. It’s akin to entering a cinema just as the credits begin to roll. Personally, I intend to keep my Rolls-Royce shares for the long haul, but I won’t be increasing my investment, certainly not with another £20,000.
