I have observed this Rolls Royce Holdings (LSE: RR.) The share price is rising and rising, waiting for a crash? Me too.
But in the interests of Rolls-Royce shareholders, I am glad I was wrong – at least so far.
Still, the price increase of over 450% in the last two years makes me nervous when I look at the price chart, even though I don’t own the shares.
Interest charges
It may sound strange to say that interest rate cuts could drive down Rolls-Royce’s share price, but I believe that could happen, even if it is only an indirect trigger.
Cuts could affect many of today’s FTSE100 Dividend stocks look cheap. Well, they already look cheap to me – some of them are dirt cheap.
But high interest rates make the returns from cash (for example in a Cash ISA) and bonds look attractive. And for investors who want to keep their risk low, this can make sense.
However, I can imagine a lot of that money going into dividend stocks once interest rates fall. And we could see money flowing from riskier growth stocks into dividend stocks when they start to rise.
Loss of earnings
The earnings forecasts for Rolls-Royce are good and so far the company has not disappointed.
In its latest trading update, Rolls told us things were going well. The company said: “Our full-year 2024 guidance remains unchanged, with a broadly balanced weighting of earnings and cash flow across the year.“.
Forecasts call for earnings per share (EPS) to reset this year and then grow. Analysts are forecasting a 20% increase in 2025 and another 17% next year. There are targets for all sorts of other measures, too.
For a resurgent Rolls-Royce, all of these figures might be appropriate. But what happens if the numbers don’t quite meet one of these values? Or if Rolls eventually reduces its performance, even if just a little bit?
For investors in growth stocks, this is often the right time to look for the next big thing.
The next big thing
Speaking of which, the world seems to be going crazy for artificial intelligence (AI) stocks, even anything remotely related to it.
NVIDIAIts valuation soared to $3 trillion, briefly becoming the most valuable company in the world. In five years, it has risen nearly 3,000%.
Here in the UK, our own Raspberry Pi Stocks has had a decent start since its IPO, trading around 40% above its original offer price. That’s promising for the world of AI and robotics. It’s early days, but I give it a good chance of becoming the next big UK growth stock.
Sell off Rolls-Royce?
None of these events could disrupt Rolls-Royce’s share price. Or perhaps one or two of them could cause slight fluctuations – as I suspected during profit-taking in early 2024.
The valuation of Rolls-Royce shares seems a bit high, with a price-earnings ratio (P/E) of 31. However, forecasts for 2026 suggest that it could drop to 22. That could be perfectly fine.
And the rise in Rolls-Royce shares is likely to continue.
The post “3 Reasons Rolls-Royce Shares Could Crash” first appeared on The Motley Fool UK.
Further reading
Alan Oscroft does not own any of the stocks mentioned. The Motley Fool UK has recommended Nvidia and Rolls-Royce Plc. The views expressed on companies mentioned in this article are those of the author and may therefore 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.
Motley Fool UK 2024
