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In September 2022, Rolls-Royce (LSE: RR) shares dipped below 70p. If you have a time machine, it would be nice to whizz back to that moment and invest the farm.
Today (20 August), the Rolls-Royce share price opened at just under 1,520p. That’s a jaw-dropping 2,071% increase. It would have turned £10,000 into £217,143.
Those of us who don’t have a time machine must content ourselves with deciding where the FTSE 100 engineering giant’s shares might go in future. When could they hit their next big milestone of 2,000p, or £20?
Has this FTSE 100 winner peaked?
Unsurprisingly, Rolls-Royce shares are slowing. They’re up ‘just’ 43% in the last year. That’s still good, but 15 UK blue-chips have done better.
Analyst forecasts suggest the slowdown will continue. Eighteen brokers produce a consensus one-year target of 1,757p. That’s a modest 15.7% above today’s price. To hit 2,000p, the stock needs to climb 32%.
I decided to get further insight, by asking ChatGPT. I use the chatbot sparingly when examining stocks. It sounds intelligent, but it’s all artificial, you know.
At least it understands its limitations, because its first reply was a cheeky: “Sorry, I haven’t got a crystal ball.” It then added that hitting £20 in the immediate future was a “big ask”. Right.
What does AI say?
ChatGPT said “there’s a lot to like” about Rolls-Royce, something most of us could have worked out ourselves. It then highlighted strong demand for aircraft engines and lucrative aftermarket servicing. “Defence remains important, while Power Systems has growth opportunities in areas including data centres.”
The chatbot added: “Its transformation programme has dramatically improved margins and cash generation.”
At this point I gave up. Basically, it was just reading from the latest Rolls-Royce annual report, reflecting management’s view of progress.
I delved deeper into broker reports and found that on 17 August Morgan Stanley hiked its price target from £15 to £20. So one broker believes in it.
I’m optimistic too, but wary of the risks. Supply chain concerns linger, with parts availability constrained. Airlines are subject to recessions and geopolitical shocks, which can hit flying hours and aftermarket revenues. Higher fuel costs are a major concern due to the Iran war. Investors are nervous about inflation, bond yields and that AI bubble. A wider stock market crash could sink that £20 ambition.
This stock is supremely expensive
The group’s Civil Aerospace, Defence and Power Systems segments have all hit cruise speed, but the real excitement surrounds its small modular reactor ‘mini-nuke’ programme. That’s a huge opportunity, but these are early days.
I’m worried about the valuation, with the price-to-earnings ratio a dizzying 52. Yet Rolls-Royce has upgraded guidance and now expects between £4.7bn and £4.9bn of underlying operating profit in 2026. If it beats that and lifts forecasts again, I reckon £20 would be in sight. But given its high P/E, any shortfall would be punished. Possibly harshly.
I think Rolls-Royce shares are still worth considering, but it might be worth waiting for a dip to reduce that P/E. Otherwise research rival FTSE 100 growth opportunities. There are plenty around, and they’re nearly all cheaper.
Should you invest £5,000 in Rolls-Royce Plc right now?
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Harvey Jones owns shares in Rolls-Royce.
This story originally appeared on Motley Fool
