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The Rolls-Royce (LSE:RR) share price powered to a fresh all-time high earlier this week. As I write, it’s near 1,550p.
This means the FTSE 100 stock is now up by an eye-popping 1,750% in just four years!
Not many people predicted such an astonishing performance. But where could the share price be in another four years’ time? I asked ChatGPT (the free version) for its input.
Be careful of confirmation bias
Before getting to the bot’s views, I want to point out the obvious. Relying solely on ChatGPT (or other AI apps) for stock picks can be dangerous. Sometimes, the data it spits out is out of date/inaccurate or the risks are skirted over.
Personally, I think the most dangerous element can be sycophancy. That is, the tendency of AI chatbots to excessively agree with or even flatter users instead of prioritising objective facts.
Last year, ChatGPT rolled back an update, saying it was “overly flattering or agreeable — often described as sycophantic“. There’s a risk then that it can parrot back your own bullish or bearish stance on a stock, thereby fuelling confirmation bias.
Having said all that, I’m not going to pretend that AI apps can’t be useful research tools, if used correctly. For example, they’re great at quickly scraping the internet to summarise clearly what a business does and how it makes money.
What did the bot say?
Speaking of money, Rolls-Royce is targeting between £5bn and £5.3bn in free cash flow (FCF) by 2028. It’s also running a £7bn-£9bn share buyback programme between 2026 and 2028.
ChatGPT gave three share price scenarios:
- Bear: 1,500p
- Base: 2,500p to 3,000p
- Bull: 4,500p
Speaking as a shareholder, either of the base and bull cases would do nicely. That would represent juicy returns from today’s share price, with dividends on top.
Unfortunately, looking at the maths the AI uses for the bull case, I’m not convinced that’s likely. It assumes Rolls-Royce will generate £8bn in FCF by 2030, continue trading at a multiple of 30, and that the share count is reduced aggressively.
I don’t think the FCF multiple is out of the question, but £8bn looks like a bit of a stretch, given that FCF this year is expected to be roughly £4bn. So it would need to double in this period.
That said, the base case looks more doable to me, assuming FCF hits £6.25bn. That would put the share price at about 2,500p by then. That’s roughly 63% higher than today’s level.
What about the bear scenario? Well, this assumes global aviation encounters “turbulence“, hitting Rolls-Royce’s cash flows. This would likely see the valuation multiple contract, leaving investors with a very disappointing four-year return.
The growth engine is humming
These different scenarios show how unpredictable such financial modelling can be, whether for humans or AI. There are too many variables and outside factors to accurately predict a share price.
As an investor, all I can really do is assess whether the company’s fundamentals are still solid and the growth engine is humming along nicely. In Rolls-Royce’s case, the answer is a resounding yes on both fronts.
As such, I’m happy to keep holding my shares until 2030. Investors might consider buying some and doing the same.
Should you invest £5,000 in Rolls-Royce Plc right now?
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Ben McPoland owns shares in Rolls-Royce.
This story originally appeared on Motley Fool
