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Tesla has fallen 35%. How I think it affects the Rolls-Royce share price

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Rolls-Royce's business aviation engine, the Pearl 700
Image source: Rolls-Royce plc

With it having such a large market cap, Tesla’s fortunes affect many other stocks. Given how influential Tesla is, it’s not out of the question that it indirectly affects Rolls-Royce (LSE:RR) too. With Tesla shares declining from around $880 in late January to $563 on 8 March, here’s how I think it affects the Rolls-Royce share price.

Tesla & Rolls-Royce 

In the past, I think demand for many electric-related stocks increased due to Tesla’s success. Although many electric stocks don’t really have anything in common with Tesla, some in the market probably thought they did (or anticipated the correlation) and bought shares of the companies. The buying somehow caused more buying and many electric stocks rallied when Tesla rallied.

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Given that air taxi stocks are electric, I reckon they benefited from Tesla’s success as well. This is despite Tesla not being an air taxi stock itself. 

I think Rolls-Royce could benefit if air taxi stocks are in high demand (despite Rolls-Royce also not being an air taxi stock itself — yet). If demand for air taxi stocks is strong, air taxi startups could find it easier to raise money. With more money, they could spend more on R&D and potentially bring a product to the mass market faster.

If air taxis become market ready faster, demand for air taxi propulsion systems could increase faster. Assuming Rolls-Royce is the leader in air taxi propulsion systems like it wants to be in the future, RR could stand to benefit with more potential growth too. 

By that reasoning, Tesla shares falling could indirectly lower demand for air taxi stocks and indirectly negatively affect Rolls-Royce.

Is it the case in practice?

While the ‘Tesla affects Rolls-Royce’ fundamental reasoning sounds compelling, the Rolls-Royce share price hasn’t really reflected it. While Tesla shares have surged in 2020, for example, RR actually decreased substantially. As a result, I don’t think Tesla falling 35% from its highs actually affects the Rolls-Royce share price all that much.

The market, in my view, seems to be more focused on Rolls-Royce’s civil aerospace business rather than its future potential air taxi propulsion business. Civil aviation gets more media attention, and Rolls-Royce’s near-term fundamentals depend a lot more on civil aviation than air taxi propulsion.

The Rolls-Royce share price: what I’d do

Rolls-Royce has uncertainty. The Rolls-Royce share price might not do well if air travel doesn’t recover like the market expects. Given that it’s a new market, it’s also not clear if Rolls-Royce will succeed in the air taxi propulsion system market like the company has in the traditional jet engine market. The British company will likely have a lot of competition in that category.

Nevertheless, I think the market isn’t really reflecting the potential value in Rolls-Royce’s air taxi propulsion business because it’s still in its very early stages. It also hasn’t gotten much press as management hasn’t really advertised it. As the technology progresses, however, I reckon the market perception of the British company’s air taxi propulsion business could increase. Given the business’ potential and the potential for air travel to eventually recover with the vaccine rollouts, I’d buy and hold shares at the current Rolls-Royce share price.

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Jay Yao has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended Tesla. Views expressed on the companies mentioned in this article are those of the writer and therefore may 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.

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