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With a few days to go until the end of the year, Rolls-Royce Holdings (LSE: RR.) shares have climbed 105% in 2025. Reaching 2,000p would need another 70%. Is that too much? Some analysts are already talking about it.
And it would pale compared to the Rolls share price climb of over 900% in five years, right? It’s not like this is a rocketing ‘jam tomorrow’ growth stock. A phenomenal performance lies behind it.
How does the price look now?
Here’s what I really find surprising when I check out the Rolls-Royce share valuation. It still doesn’t seem overvalued, especially when I think about what forecasters expect — and when I look at at the company’s own guidance.
There’s a year-end price-to-earnings ratio of 20 forecast now. With the FTSE 100 typically averaging around 15, that’s not obviously cheap. In fact, other things equal, it might even look a bit pricey.
But for a company with Rolls-Royce’s long-term potential — in all three of its key markets — a valuation like that would not itself put me off. Some US tech stocks command valuations way in excess of that. And, we must remember, Rolls potentially has its finger in the AI pie too. Its small nuclear reactors — already chosen for use in the UK — are being eyed up for powering the soaring number of AI server farms.
Remember rule one
Warren Buffett urges us to seek great companies at fair prices. And from where I’m standing, that does seem to describe Rolls-Royce. But I also remember his Rule Number One: Never lose money. Despite a rosy broker outlook, I fear that could happen if I buy Rolls-Royce shares now.
Rolls Royce’s rapid profit and cash growth in recent years has been driven by two key things. One is the recovery and boom in civil aviation since the pandemic almost killed it off. Rolls earns a good chunk of its income from long-term engine service contracts.
Rising military spending has also provided a boost, with many countries beefing up their defence budgets. But neither of these trends can keep going indefinitely. Both have to reach a plateau reflecting new levels of demand.
The small modular reactor (SMR) business appears to hold great promise. But it doesn’t look like we’re going to see profits from the division for a while yet.
Broker optimism
Searching around broker views on Rolls-Royce, the highest price target I’m seeing is a shade over 1,600p. That’s going to be a relatively short-term thing, but it would already be more than halfway to the 2,000p level. So does it support the idea of reaching it in 2026?
I can definitely see a chance it could happen, yes. But I’d never invest with a specific price target in mind. For me the risks I see relating to slowing profit growth — and investors just moving on to the next big thing — mean I’ll keep away for a while. I’m still hoping for better opportunities from any future dips.
