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Rolls-Royce (LSE:RR) shares took off like a rocket in autumn 2022 and have been flying ever since. They have increased almost 500% in two years. who needs NVIDIA anyway?
In general, I am wary of momentum stocks, assuming that at some point they will run out. However, to my surprise, Rolls-Royce's share price continued to shine in 2024.
It opened the year trading at around 297p. Today, it is around 587p. That's an increase of 97.6%. There was no dividend. This happened during the pandemic, but it should return this year, long awaited.
This FTSE 100 stock is a world leader
If I had been brave enough to invest my entire £20,000 stocks and Shares ISA allocation into the FTSE 100 engineering giant in early 2024, today it would be worth a whopping £39,520. That shows the greater potential rewards of investing in individual stocks, rather than just following an index. Naturally, the risks are also greater.
I'm not going to calculate how much I would have if I had invested £20,000 in Rolls-Royce two years ago. That would just make me sad.
I own these shares so I have had a share in their success but, as always, the only question that really matters is where does Rolls-Royce go next?
I will make a safe prediction. The stock price is not going to go up 100% or 500% or anything like that. Transformational CEO Tufan Erginbilgic has spread his magic, but there is much work ahead. With the stock trading at 42.79 times trailing earnings, you can't afford any mistakes. Rolls-Royce has a growth price tag and it had better deliver on it.
Erginbilgic deserves its early success by working hard to change the company's culture, boost its operational efficiency, reduce costs and expand margins. It was also lucky as it arrived just before the post-Covid recovery in global aviation, which revived demand for the company's jet engines and after-sales services.
Of course, Rolls-Royce isn't just about airplane engines. Third-quarter results, released Nov. 7, showed strong remaining demand across all three divisions: civil aerospace, defense and power systems.
Growth will be much slower
The group is also moving towards green technology, such as small modular nuclear reactors and sustainable aviation fuels. Hopefully, this could create long-term value, but that's far from guaranteed.
An economic slowdown, geopolitical tensions and supply chain disruptions could throw Rolls-Royce off course in 2025. Its Trent 1000 engines remain controversial and its US rival boeing has shown us the pain that technical problems can cause to a company's share price.
The 12 analysts offering one-year share price forecasts for Rolls-Royce have produced an average target of 609.6p. If correct, that represents an increase of a meager 4.2% from today. That's a bit of a letdown, after all the recent enthusiasm. stocks would do better if we achieve a broader economic recovery. That is also at stake.
However, eight analysts rate the stock as a Strong Buy, and two others call it a Buy. Only one calls it Strong Selling.
Anyone who comes to this stock today must accept that they have missed the best. It feels a little like walking into a movie just as the credits roll. I will hold my Rolls-Royce shares for the long term, but I will not invest further. And certainly not £20,000.
