Up nearly 1,400% in 5 years! But are Rolls-Royce shares still secretly undervalued?

Few stocks in British market history have delivered a run quite like Rolls-Royce (LSE:RR.) shares.

From the darkest days of the pandemic, the FTSE 100 engineer has climbed nearly 1,400% to sit at around 1,400p today. That’s the kind of return that creates generational wealth.

But it also raises an uncomfortable question: has the stock now run out of road? Or is this still just the beginning?

The bull case: two enormous growth catalysts

Even with the impressive share price surge, the most exciting chapter in Rolls-Royce’s story may not yet have been written.

The next major growth opportunity is nuclear energy. Rolls-Royce’s small modular reactors (SMRs) received formal nuclear justification approval from the UK government earlier this year, secured a £599m loan from the National Wealth Fund to begin work at the Wylfa site on Anglesey. It also signed an Early Works Contract with CEZ Group to deploy up to 3GW of electricity in the Czech Republic.

That means Rolls-Royce is now the only company in the world with multiple contractual commitments to deliver SMRs across Europe. That gives it a genuine first-mover advantage in a market that could eventually be worth hundreds of billions.

At the same time, the firm’s UltraFan engine programme is also making impressive strides. With more testing scheduled before the end of 2026, the project’s making steady progress. And with multiple airlines looking to modernise their fleets to improve fuel efficiency, Rolls-Royce looks nicely positioned to capitalise on this accelerating tailwind.

With that in mind, it isn’t surprising to see some institutional analysts like Bank of America forecasting Rolls-Royce shares to climb even higher to around 1,740p.

The bear case: priced for perfection

There’s no denying Rolls-Royce is on a bit of a technological rampage. But whether that can translate into further share price momentum remains a big question mark.

Bank of America’s aggressive price target is dependent on the continued success of Rolls-Royce’s core aerospace operations as well as near-perfect execution of its UltraFan and SMR projects. Yet that’s far from guaranteed.

UltraFan has been in development for over a decade, while SMRs aren’t likely to start generating any revenue until the 2030s at the earliest. Until then, there remains a lot of opportunities for spanners to be thrown into the works. And it’s why some institutional analysts are actually projecting Rolls-Royce shares to fall from current levels.

So what should investors make of all this?

The bottom line

Rolls-Royce is a genuinely world-class business executing brilliantly under CEO Tufan Erginbilgiç. It successfully capitalised on the recovery of the civil aerospace sector following the pandemic, and is now positioning itself to ride even more powerful long-term tailwinds for SMRs and next-generation engines.

But with the shares trading at a forward price-to-earnings ratio of 35, a lot of this growth potential already seems to be priced in. That’s why for investors expecting gargantuan returns, there may be better growth stocks to explore elsewhere.

Should you invest £5,000 in Rolls-Royce Plc right now?

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Zaven Boyrazian does not hold any positions in the companies mentioned.