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Many discussions about Rolls-Royce (LSE:RR) share price in recent months is based on values. Specifically, some are beginning to think the stock is overvalued, given its 99% rally in the past year to levels not seen in more than a decade. Despite this, I think some investors have missed one important growth area, which could inject more life into the stock in the future.
Go nuclear
I am talking about the increased use of nuclear power. This sector is rapidly emerging as a leader in the global energy revolution, and clean sources are in high demand. A large part of this comes from the technical area. AI processors and models require an incredible amount of power. In the past few months, big companies like Amazon again Microsoft they have signed power purchase agreements, which many are likely to follow.
As I consider AI adoption and use still in its early stages, the scope of demand for nuclear power can grow exponentially from here in the coming years. Now let’s tie this idea to Rolls-Royce. The company is a leader in the development of Small Modular Reactors (SMRs). These are a new and cost-effective solution for nuclear power generation.
As countries begin to adopt SMRs for electric power generation, Rolls-Royce may capture significant market share. In addition, it is important to note that the company has already received government funding for some nuclear projects. In the long term, I would expect more investment from the public sector, which could help increase overall revenue from this sector.
Show me the money
Investors may like the sound of things so far, but there are big considerations that haven’t been addressed. That is, what financial benefit can this area contribute to the overall business?
This is where things get complicated. The public company owns and holds a majority stake in Rolls-Royce SMR Limited. However, the half-year results indicate that “Increased planned costs at SMR to meet development milestones resulted in an operating loss of £91m compared to £78m in the prior period.”
Put another way, this area is still being developed and is currently generating losses. I can’t find any information about when it is expected to transition to posting a profit, or revenue estimates. Full year results will be out in a little over a month, when I expect more information will be provided. This should also include detailed comments on the nuclear weapons front.
Share prices
Investors may see the lack of nuclear financial results so far as a risk right now. I accept this, but stocks can often trade based on future expectations, not just past results. Therefore, I think the share price is likely to rally in the coming year based on increased awareness of nuclear as a theme and the foundations that Rolls-Royce has in this area. In fact, I wouldn’t be surprised if the stock gets a big boost from the excitement over nuclear power.
I will wait and see what will be revealed in the results of the year and make a decision there.
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