The Rolls-Royce Holdings (LSE: RR.) share price has experienced significant growth over the past year, climbing 90%, and over 900% in five years. However, after reaching a 52-week high in September, the shares have seen a decline of 13%, returning to levels observed in August. Investors should be aware of potential disruptions that could impact the stock’s trajectory.
Three Threats That Could Disrupt Rolls-Royce Share Price
Cyclical Aviation Demand
The civil aviation sector plays a crucial role in Rolls-Royce’s market stability. The company’s share price suffered a severe downturn during the pandemic, driven by a crash in aviation demand. Although recovery has been robust, there are concerns that demand may have peaked.
Furthermore, the costs associated with developing new engine technologies could pose risks. While military aviation has contributed to the financial recovery, growth in this sector may eventually stabilize or decline.
Global Economic Challenges
Rolls-Royce heavily relies on global trade for procurement of parts and materials. Current geopolitical tensions and rising prices could threaten this supply chain. Additionally, the company faces regulatory risks, particularly in civil aviation, with the increasing necessity to tackle climate change.
The push for greener technologies is likely to affect operational costs as Rolls-Royce invests in developing hydrogen engines. However, commercial production remains years away.
Nuclear Power Development
Rolls-Royce’s initiative in small modular reactors (SMRs) represents a significant aspect of its future growth. The UK Government’s approval of the first SMR power station at Wylfa, Anglesey, marks a promising development. However, the financial viability of this venture raises concerns.
CEO Tufan Erginbilgiç mentioned during a July update that profit and positive cash flow from the SMR segment may not materialize until 2030. This timeline suggests a need for substantial investment before any returns can be expected, potentially impacting the stock price.
Investment Outlook
While there are identifiable risks concerning the Rolls-Royce share price, a complete collapse is not anticipated. Investors should remain cautious, acknowledging the challenges that may lead to share price fluctuations. Maintaining a long-term perspective could be beneficial, especially if opportunities arise to acquire shares at lower prices.
