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Here’s what I think investors are missing about the Rolls-Royce share price

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

When I look at the Rolls-Royce (LSE: RR) share price, I see a company the market loves to hate. The stock has underperformed the market for years now, as investors have decided to avoid the business. 

This selling pressure only intensified last year. It is easy to see why. The pandemic grounded the airline industry, and Rolls generates the vast majority of its revenues and profits from maintenance contracts on aircraft engines. These contracts are tied to the number of flying hours completed by each machine.

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If the machines are not in the sky, Rolls is not earning money. It is as simple as that. The company has other divisions, but none are as big and as important as the civil aviation business. 

Rolls is much more than a civil aviation business. And thanks to recent developments, I think the company may have a chance to prove its potential over the next decade. 

Technology development

Two things spring to mind when the Rolls-Royce brand is mentioned. Cars, which the group no longer produces, and aircraft engines, which it does.

Nuclear reactors do not spring to mind, even though the organisation has been manufacturing reactors for nuclear submarines since the 1950s. This is arguably the company’s most valuable division. Nuclear technology is closely guarded and can be quite lucrative in the right hands. 

The market for nuclear submarines in the UK has never been huge, so Rolls has never been able to capitalise on its position in this market. 

However, it now looks as if the company will be able to develop its land-based small modular reactor programme. This programme aims to develop smaller reactors, which are cheaper and easier to manage than traditional nuclear power plants. 

Rolls and its partners are closing in on backing from the government, which would allow them to build 16 of these smaller reactors around the UK. 

Government backing would be a huge step forward for the company. It could also potentially open up the international market. The size and scale of these reactors mean the consortium may be able to sell to a broader range of country customers. This could potentially generate billions in sales and profits for the group. 

Rolls-Royce share price growth 

This is what I think investors are missing when they look at Rolls-Royce as an investment. This company owns some incredibly valuable technology, and it should be able to monetise this over the next few decades. 

Unfortunately, investors with a short-term time horizon may not be willing to stick around. This technology will take at least a decade to develop. In the meantime, the company could be exposed to some significant risks. These include further coronavirus disruption, rising inflation, and competition in the aviation sector. There is also no guarantee the technology will work at this stage.

Still, I am incredibly excited about the potential for mini nuclear reactors. That is why I would look past the short-term headwinds and buy a speculative position in the stock as a growth play.

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Rupert Hargreaves has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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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