Will the Rolls-Royce share price reach £4 or £5 first?

After its incredible rise, this Fool takes a closer look at what could be in store for the Rolls-Royce share price in the times ahead.

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Image source: Rolls-Royce plc

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I’ve been patiently waiting on the sidelines watching the Rolls-Royce (LSE: RR) share price continue to climb. I’m yet to invest. Nevertheless, the stock’s well and truly on my radar.

But at £4.60 a piece, are Rolls-Royce shares more likely to fall to £4 or rise to £5 first?

Past performance is by no means an indication of what a stock could do. But if it was, I’d be pretty confident in saying the stock will break the £5 barrier before we see any share price decline.

After all, shares in the FTSE 100 icon have been gaining incredible momentum. In the last 12 months, they’re up 212.4%.

Yet the stock market’s more turbulent than that. What could be on the horizon next for Rolls is unknown.

The bear case

I’ve long talked about how my largest concern with Rolls stock is that it’s gone too far, too soon. And while I could be forced to swallow my words should it keep rising, it’s still a worry of mine.

It’s probably the main reason I’ve avoided adding the stock to my portfolio. Its rise has been nice to see, I always want to see British companies excel. However, I don’t want to buy shares now only for my investment to dwindle.

With Rolls, I think there’s the threat that happens. Investors have pushed the stock up in recent times. As easily as it’s soared, it could tumble.

Today, Rolls-Royce shares trade on 57.5 times forward earnings. The Footsie average is 11. In my opinion, that sort of reading could prompt a sharp recoil in its share price. To fall to £4, the stock would have to decline 13.1%.

The bull case

But on the flip side, an 8.7% rise would see its share price hit the £5 mark. There’s plenty of reasons to believe it’ll get there. And while I think Rolls looks expensive, I’ve been impressed with how it’s turned itself around after its pandemic struggles.

At one point, it seemed the business may have even been destined for bankruptcy. It was crippled with debt and multiple lockdowns took a serious toll on the firm.

Now, Rolls looks like a much stronger business. Profits are up and it’s generating free cash flow again. It has some lofty ambitions for the near term. So far, it seems on track to meet them.

Recently, the business announced that engine flying hours had recovered to 2019 levels. Interest rate cuts could lead to demand for travel to rise. This will only provide it with more momentum.

What’s more likely?

Whether Rolls breaks down to the £4 mark or surpasses the £5 barrier first is anyone’s guess. But what I do know is that I’ll be holding off from adding the shares to my portfolio for now.

Its turnaround has investors excited. But inevitably, the surge in growth we’ve seen will come to an end. I’m worried at that point we could see its share price fall.

I’m watching it like a hawk. Any sign of a dip in the market and I’ll be taking full advantage.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Charlie Keough has no position in any of the shares mentioned. The Motley Fool UK has recommended Rolls-Royce Plc. 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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