Is the Rolls-Royce share price in a bubble just waiting to burst?

With the Rolls-Royce share price skyrocketing to undreamed of highs, will it crash in 2025? Or maybe just keep going up some more?

| More on:
Mother and Daughter Blowing Bubbles

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.

The thing with bubble stocks is that they’ve risen a lot, just like the Rolls-Royce Holdings (LSE: RR.) share price. And I mean a lot. It’s soared more than 10-fold since its 2020 lows. And it’s nearly doubled in just the past 12 months.

I see reasons to fear we could be in a bubble, with the price rise just one of them. Buying after everyone else is already in can be a path to disaster.

I’m also wary of over-enthusiasm. The trouble is, often nobody notices it before it’s too late.

Should you invest £1,000 in Rolls-Royce right now?

When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets. And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Rolls-Royce made the list?

See the 6 stocks

Created with Highcharts 11.4.3Rolls-Royce Plc PriceZoom1M3M6MYTD1Y5Y10YALLwww.fool.co.uk

Bullish boss

Here we have CEO Tufan Erginbilgic, saying things like: “Our transformation of Rolls-Royce into a high-performing, competitive, resilient, and growing business is proceeding with pace and intensity.” That was at interim results time, when he was going on about “a relentless focus on commercial optimisation and cost efficiencies.”

That’ll just get more people piling in, won’t it? Pump that bubble. Even with November’s trading update, we had to listen to stuff about “a front-end-loaded delivery of profit and cash flow improvements” and that kind of cheeriness.

Yes, I know he’s lived up to his claims so far. And his upbeat words turn into positive results every time we get a new update. But that won’t convince a part-time pessimist like me.

Getting serious

You’ve probably guessed my negativity isn’t entirely serious. And I’m not getting on Mr Erginbilgic’s back. In fact, I’ve been seriously impressed by what he’s achieved at Rolls-Royce in the short time he’s been in charge. He seems like one of the best.

But there’s a serious side to this. And it’s based on years of experience of what can go wrong to dash investors’ hopes. I’ve just seen so many of them pump up their expectations, thinking their company is going to exceed them every single time.

Will Rolls-Royce some day manage just to hit its targets without going beyond them? Maybe it will, dare I breathe the words, fall slightly short of expectations? Or, horror of horrors, perhaps have to downgrade its outlook ever so slightly?

Off the boil

Something like that has happened to every single growth stock I’ve ever watched since I started in this investment game. And every time, a significant portion of its shareholders have run like the wind and down has gone the share price.

Now, there’s maybe a bit of poetic licence there too. And a growth spell can progress into a more mature steady period, with the company supported mainly by long-term investors with their eyes fixed on the far financial horizon. Those can be the best of times. And I can see such times coming for Rolls-Royce.

In the meantime, the stock’s valuation doesn’t scream ‘bubble’ to me. A price-to-earnings ratio dropping to 24 based on forecasts out to 2026 might be just fine. So we could be in for another good year, even if the share price might not double again.

On balance, I think it’s unlikely we’ll hear a loud pop in 2025. But I do see a decent chance we could be in for some fallbacks and better buying opportunities. I hope so.

Pound coins for sale — 31 pence?

This seems ridiculous, but we almost never see shares looking this cheap. Yet this Share Advisor pick has a price/book ratio of 0.31. In plain English, this means that investors effectively get in on a business that holds £1 of assets for every 31p they invest!

Of course, this is the stock market where money is always at risk — these valuations can change and there are no guarantees. But some risks are a LOT more interesting than others, and at The Motley Fool we believe this company is amongst them.

What’s more, it currently boasts a stellar dividend yield of around 10%, and right now it’s possible for investors to jump aboard at near-historic lows. Want to get the name for yourself?

See the full investment case

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 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

Young mixed-race couple sat on the beach looking out over the sea
Investing Articles

FTSE shares: the perfect ‘get rich slow’ idea?

As a long-term investor, Christopher Ruane reckons the FTSE 100 could offer him the foundations to create stock market wealth.…

Read more »

Investing Articles

Here’s how an investor in their 30s could aim to turn a £10k ISA into £132,676 by retirement

Christopher Ruane explains how someone with a 30-year investing timeframe could aim to increase an ISA stuffed with blue-chip shares…

Read more »

Investing Articles

£10,000 invested in Rolls-Royce shares 5 years ago is now worth…

Rolls-Royce shares have made a lot of investors very rich as they push to new heights. Dr James Fox explores…

Read more »

Investing Articles

£20k split between these 2 FTSE value stocks 1 month ago is now worth…

Harvey Jones has had his eye on two value stocks from the FTSE 100. Suddenly they've both taken off at…

Read more »

Investing Articles

Gold’s hit record highs – and these former penny shares have soared over 115%!

After gold recently hit record highs, it may be no surprise that two former penny shares focused on the yellow…

Read more »

Investing Articles

£20k in a Stocks and Shares ISA? Here’s how to target passive income of £633 a month

Christopher Ruane explains how an investor could turn a Stocks and Shares ISA into a passive income goldmine with a…

Read more »

Passive and Active: text from letters of the wooden alphabet on a green chalk board
Investing Articles

How much passive income could I earn from dividends by investing £5,000 a year in the UK stock market?

When starting out it's often the first thing investors ask: how much passive income can I earn? Mark Hartley attempts…

Read more »

Young woman holding up three fingers
Investing Articles

3 steps to start investing with under £300

Christopher Ruane walks through a trio of steps that someone who wants to start investing with just a few hundred…

Read more »