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The Rolls-Royce (LSE:RR) share price is up 1,752% from its lowest point in the last five years. That would mean £10,000 invested then would be worth a phenomenal £185,200 today. There’s almost no asset in the world that has outperformed Rolls-Royce.
Of course, there were risks of investing in Rolls at the time. I was incredibly concerned about its debt position. But eventually I realised all the commentary was simply incorrect. If my memory serves me well, it was a Credit Suisse analyst that highlight the stock could be undervalued by a magnitude of five times.
Anyway, what’s happened in the past isn’t necessarily a guide to what comes next. Yes, there are lessons to be learned. But the important question is what’s going to happen next?
The valuation conundrum
Rolls-Royce is starting to look rather expensive, but it’s all contextual. The company operates in sectors with huge moats, where scale, certification, and long development cycles make meaningful competition extremely difficult.
The stock’s currently trading at 39.1 times forward earnings (for the next 12 months) and has a price-to-earnings-to-growth (PEG) ratio around 2.9. That would normally be considered a vast overvaluation, even given the pristine balance sheet. However, it’s trading in line with its most relevant/only peer GE.
Once again, compared to industry norms, other valuation metrics look concerning. For example, the price-to-book value is way above industry averages. However, the sector-topping operating margin of 20.6% highlights just how strong the company’s moat is.
The SMR factor
I do thinks there’s a very real concern that investors will start to question the valuation if growth continues along the expected trajectory. Because it’s expensive and quality has come under pressure from AI over the past year… just not in this sector.
However, there’s a little something called Small Modular Reactors (SMRs) to consider. Rolls-Royce is developing leading SMR technology and has secured early demonstrator contracts that could anchor future growth.
This sector’s poised for expansion as countries seek reliable, low-carbon energy solutions — especially for data centre power generation. And these early positions give the company a foothold in a market that could scale significantly over the next decade.
If deployment accelerates, SMRs could become a meaningful long-term value driver, supporting the company’s growth narrative. This is currently factored into most earnings forecasts. And that’s an area of change worth watching very closely.
There’s also excitement around US start‑up Oklo, which builds on decades of reactor technology to develop compact, low‑carbon nuclear solutions. The pre-revenue, Sam Altman-backed company has a valuation in excess of $20bn. So there’s a lot of hype around these SMRs.
The bottom line
In short, Rolls-Royce looks expensive and is unlikely to continue delivering outsized gains in the near or medium term. However, SMRs could be the game changer than reignites sentiment. I still think Rolls is worth considering, but the margin of safety really isn’t there anymore.
