3 reasons the Rolls-Royce share price might crash

Can anything stop the rise and rise of the Rolls-Royce share price? Maybe one day something will, and it might just be one of these.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Tabletop model of a bear sat on desk in front of monitors showing stock charts

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Been watching the Rolls-Royce Holdings (LSE: RR.) share price climb and climb, waiting for a crash? Me too.

But for the sake of Rolls-Royce shareholders, I’m glad I’ve been wrong… so far, at least.

Still, looking at the share price chart, that 450%+ rise of the past two years does make me nervous. And that’s even when I don’t own the shares.

Interest rates

It might sound strange to suggest that cuts in interest rates could send the Rolls-Royce share price down. But I think it could happen, even if it’s only an indirect trigger.

Cuts could make a lot of today’s FTSE 100 dividend stocks look cheap. Well, they look cheap to me already — some of them dirt cheap.

But high interest rates make returns from cash (in a Cash ISA, for example) and bonds look good. And for investors who want to keep their risk down, that can make a lot of sense.

I can see a lot of that cash moving to dividend stocks once rates reverse though. And we might see cash moved from higher-risk growth stocks to income shares if they start to rise.

Earnings miss

Forecasts look good for Roll-Royce earnings and, so far, it hasn’t disappointed.

In its most recent trading update, Rolls told us that things are going well. The firm said: “Our full year 2024 guidance is unchanged, with a broadly balanced weighting for both profit and cash flow across the year“.

Forecasts show earnings per share (EPS) resetting this year, and then growing. Analysts predict a 20% climb in 2025, and another 17% the next year. There are targets for all sorts of other measures too.

They might all be reasonable for a resurging Rolls-Royce. But what happens if the figures don’t quite meet one of these? Or Rolls lowers its quidance some time? By even a little bit?

For growth stock investors, that’s often time to go look for the next big thing.

Next big thing

Talking of that, the world seems to be going mad for artificial intelligence (AI) stocks, even anything remotely connected.

Nvidia‘s surged to a $3trn valuation, briefly becoming the world’s most valuable company. It’s up nearly 3,000% in five years.

Here in the UK, our very own Raspberry Pi Holdings is off to a decent start since IPO, around 40% up on its initial offer price. That holds promise for the AI and robotics world. It’s early days, but I give it a good chance of turning into the next big UK growth stock.

Dump Rolls-Royce?

Now, none of these things might upset the Rolls-Royce share price. Or maybe one or two of them could cause a slight wobble — like I thought profit-taking was set to do in early 2024.

The Rolls-Royce stock valuation does looks a bit high, with a price-to-earnings (P/E) ratio of 31. But it could drop to 22 on 2026 forecasts. That might be just fine.

And the Rolls-Royce share price train might keep powering along.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Alan Oscroft has no position in any of the shares mentioned. The Motley Fool UK has recommended Nvidia and Rolls-Royce Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

Should I sell my FTSE All-Share index fund and buy a S&P 500 tracker instead?

Harvey Jones is wondering whether now is a good time to invest more money in the S&P 500, after a…

Read more »

Investing Articles

Should I buy dirt-cheap BT shares after the recent pullback?

BT shares were on the up but now they're sliding again after the board trimmed full-year guidance. Now Harvey Jones…

Read more »

Investing Articles

Up 28%, can the easyJet share price keep rising?

The easyJet share price has gained altitude over one year but plunged over five. Is now an attractive time for…

Read more »

British Isles on nautical map
Investing Articles

Should I buy more BAE Systems shares at 1,350p?

BAE Systems shares have had a fantastic run since early 2022, yet still don't appear overvalued. Is it now time…

Read more »

Young woman working at modern office. Technical price graph and indicator, red and green candlestick chart and stock trading computer screen background.
Investing Articles

7% yield and a cheap valuation! Is this one of the best shares to buy this month?

Christopher Ruane has been looking for cheap shares to buy. This one has a 7% dividend yield, so is it…

Read more »

Man writing 'now' having crossed out 'later', 'tomorrow' and 'next week'
Investing Articles

Should I buy National Grid shares for the big dividend before it’s too late?

This year's price weakness has left National Grid shares on what looks like a tempting valuation. I hope it doesn't…

Read more »

Investing Articles

There are now 5,000 ISA millionaires! See the surprising UK dividend shares they’re buying

The number of ISA millionaires is growing all the time and guess what? They're really into blue-chip dividend shares listed…

Read more »

Blue NIO sports car in Oslo showroom
Investing Articles

Down 38% in weeks! Time to snap up NIO stock?

NIO stock's more than doubled in value over the past five years but has been on a wild ride lately.…

Read more »