Is Rolls-Royce's share price terribly overvalued?

I want to take action when I see the Rolls-Royce The share price (LSE:RR) has risen more than 300% since October 2022.

However, as someone who is passionate and experienced in investing, I think it is a misstep unless you analyze the situation first.

Therefore, I have decided to break down precisely what is happening here. My goal is to determine whether Rolls-Royce shares are grossly overvalued and uninvestable.

What caused the takeoff?

Under the leadership of new CEO Tufan Erginbilgic, the company plans to quadruple its profits within five years.

The company is also selling non-core assets, including the electric-powered aircraft business, to focus on wide-body aircraft and business aviation.

This focus on efficiency and profitability is driving up the share price, which is working for now.

Why am I worried?

I think the rise in Rolls-Royce's share price is premature. Yes, the company's one-year revenue growth rate is 32%. But in 10 years, it has been -4.30%.

This is a concern for me. I think the current share price rise suggests that investors expect this revenue growth to not only sustain but continue to increase.

I'm curious if the company can achieve such a significant turnaround thanks to a new efficiency-focused CEO.

Here's the good news: net income is currently £1.5bn over the last 12 months. But in December 2017 it was £3.4 billion; That's the bad new. Worse still, net income fell to negative £1.3bn in December 2019. What does this mean for me? Unfortunately, instability.

A look to the future

Looking ahead, I want to have a more complete view of the direction of Rolls-Royce.

I found a powerful chart from the company's December 2023 investor presentation that outlines management's long-term expectations:

UltraFan is one of the specific operations I'm most excited about. It is described as a leading technology for next-generation aircraft. It features advanced materials and is designed to improve fuel efficiency and reduce emissions. It is under development and testing as a step towards sustainability and effectiveness.

Commercial passenger flights remain the company's largest business segment. Defense is second and energy systems third.

Significantly, the company's aerospace profit margins are expected to increase from 2.5% last year to 15-17%. And although I am not happy with the current wars in the world, defense spending is increasing and will probably benefit Rolls-Royce.

In addition, new markets, such as small reactors and other electricity generators, could be developed in the coming years.

The bottom line

I don't think the current share price is fair at this time. Given that net income, revenue and operational recovery are all in growth stages, I think the market has overreacted.

Unless the company's financial predictions come true and then some, I think the stock price will plummet very soon.

Maybe I'm wrong. Forecasting is always a complicated art. However, I won't be buying the stock because I would need more evidence of income stability before doing so.