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The Rolls-Royce (LSE: RR.) share price has doubled so far in 2025. But it’s gone off the boil a bit in the past month, as AI-related stocks in the US have wobbled.
What’s the relevance of AI to Rolls-Royce? It’s those nuclear power plants it’s building — the small modular reactors (SMRs). As well as other potential applications, many see them as perfect for powering AI server installations.
I see no need to panic right now. Rolls-Royce shares have lost 4.1% since their 52-week high at the end of September. That might be no more than random short-term fluctuation, perhaps with a bit of profit-taking creeping in.
But some analysts are voicing fears of a prolongued Rolls-Royce share price slide. So it’s got to be a good time to take stock.
What the naysayers say
I’ve been looking around at what some of the more bearish analysts have been saying recently. And at where they place their own estimate of the intrinsic value for Rolls-Royce shares. I’m seeing suggestions of around 565p to 930p among the bears. That suggests overvaluation to the tune of anywhere between around 25% and 100%.
What’s informing these downbeat outlooks?
Maybe, it’s in part due to a forecast earnings dip on the cards for 2025. I see a current consensus for 26.2p earnings per share (EPS) for the current year. Still, with first-half results in July, the company posted a strong 15.7p EPS — though that is an adjusted figure.
Now, a single period’s earnings shouldn’t mean much to long-term investors. And that’s especially true of a company whose contracts and revenue can be lumpy.
But it does hint at one thing. When a growth stock reaches this kind of high-profile status, investors tend to expect excellence at every step of the way. One result that comes in even just a bit below hopes, and the share price can take a tumble.
Valuation, valuation
What it has to come down to is valuation — and I can see some people thinking that’s a bit high now. Looking at the most commonly used valuation measure, the Rolls-Royce forward price-to-earnings (P/E) valuation stands at over 44. Other things being equal, lower is better. And that’s close to three times the long-term FTSE 100 average.
The P/E can be misleading. And in this case, the cash mountain Rolls-Royce is building up makes the P/E look richer than it really is. Forecasts suggest £1.8bn net cash by the end of this year, rising as high as £6.9bn by 2027.
And by then, the P/E would be down to around 30 if earnings forecasts prove accurate.
Crash or no crash?
So back to my headline question, are we heading for a Rolls-Royce share price collapse? I can see a possibility of a correction — maybe even a sharp one — if an AI slump takes hold of the US stock market.
And I could see the shares facing a bit of volatility in the next couple of years as we wait for the market’s lofty expectations to come good — hopefully.
But a collapse? I think the odds are probably against anything major. But I’m definitely considering buying if any significant falls provide better buying opportunities.
