Just when you think the Rolls-Royce (LSE:RR) party was ending, the stock jumps another 28% in a week. It’s an incredible rally (up 109% in the past year) that has just taken another move higher, currently just above £8.
Here are a few reasons why the Rolls-Royce share price could reach £10 by the end of 2025.
Strong earnings growth
One of the key reasons behind the short-term spike was financial results exceeding expectations. This has been a theme over the past couple of years, with dramatically improving profitability driven by CEO Tufan Erginbilgiç’s turnaround strategy.
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The 2024 results showed an operating profit of £2.46bn, up significantly from the £1.59bn from the previous year. The profit margin ticked higher too, up from 10.3% to 13.8%. This healthy margin helped lift profit before tax to £2.29bn, higher than the £1.26bn recorded in 2023.
Given that the business provided an upbeat outlook for this year, continued earnings growth should support the share price heading higher. For example, to get to £10, we’d need to see a roughly 25% increase in the share price. Assuming the price-to-earnings ratio stays the same and earnings per share increase by 25%, £10’s a realistic target. For comparison, earnings per share just increased by 47%.
New markets expansion
Last month, I wrote about how nuclear energy usage is rapidly increasing. Artificial intelligence (AI) processors and models need an incredible amount of power, and clean energy sources are being targeted to fuel this. Given that I feel we’re still at the early stages of AI adoption, there’s huge potential here for companies involved.
Rolls-Royce is at the forefront of developing Small Modular Reactors (SMRs). These are an innovative and cost-effective solution for nuclear power generation. The public company owns Rolls-Royce SMR Limited and has the majority stake in it. It’s still operating at a loss, but the latest results indicated that this area has “a significant value creation opportunity”.
Should this materially take off this year, I think the share price could increase. For example, Constellation Energy stock is up over 400% in the past five years, as the energy stock positions for AI demand. If Rolls-Royce can take advantage of this area of growth as well, a 25% move higher seems very reasonable.
Tempering optimism
Before we get ahead of ourselves, a continued rally isn’t guaranteed. Some cite concern around the high valuation. The price-to-earnings ratio is now 38.76, well above the fair value benchmark figure of 10 that I use.
Another risk is that most of the transformation efficiencies of cost-cutting have now been achieved. So for further gains in profitability, it will need to come from higher demand. Put another way, the low-hanging fruit to improve finances could now be over.
Overall, there’s a strong case to be made for Rolls-Royce shares moving higher this year, so it’s a stock I feel investors might want to consider.
