UK stocks have enjoyed a very decent run so far in 2025, as evidenced by the FTSE 100 rising by 11.6% this year.
One of the constituents of the index that has enjoyed an incredibly splendid year is Rolls-Royce (LSE:RR). The aircraft engine manufacturer has seen its shares increase by 95.4%. The Footsie’s return is very pale in comparison.
This isn’t for no reason, either. The company continues to see very strong results. I particularly see its investments in nuclear energy as a potential catalyst for even further growth.
The future of energy
Rolls-Royce has been investing in small modular reactors (SMR) since 2015, when it set up Rolls-Royce SMR and began designing its first one.
I want to discuss what SMRs are first, before I talk about the company’s venture into it. Essentially, the technology changes the approach of nuclear energy from a large and complex infrastructure project into a factory-built product that can be commoditised.
This provides many benefits as an energy source. This is because they are both quicker to produce and less capital expenditure is required than traditional nuclear energy plants. There’s also a lot more flexibility with where they are situated, and they are cleaner for the environment. They can also be coupled with other energy sources (both renewable and non-renewable), which provides greater efficiency.
Rolls-Royce is making huge strides in this industry. It already has agreements with the UK and Czech governments to provide them with SMRs. It has also been shortlisted by Sweden as one of only two companies that could potentially provide them with SMRs.
The company’s CEO, Tufan Erginbilgiç, believes that by 2050, 400 SMRs will be needed globally. These could cost up to $3bn each, which means there’s a potential trillion-dollar-plus market the firm could take advantage of for even further growth.
The key risk
The biggest problem with SMRs is that their success as an energy source is largely unproven. Moreover, some concerns persist over the strains put on water supplies for the technology’s cooling system.
If the technology doesn’t live up to the hype around it, it could have bad consequences for Rolls-Royce shares.
The company’s shares currently have a price-to-earnings (P/E) ratio of 43.9. This is already quite expensive. While I believe it’s justified by the firm’s strong performance in recent years and strong growth potential, its share price could come crashing down if SMRs fail to have the impact that’s expected.
Takeaway
While there are clear risks with SMR technology, if it is successful, then there could be great rewards. We shouldn’t forget how large the opportunity of this market is.
Further, there’s plenty more to like about Rolls-Royce besides its investments in nuclear energy. Its recent half-year results were very impressive, with revenue rising from £8.2bn in the same period last year to £9.1bn this year. Underlying profit also increased by 50%, and its operating margin expanded from 14% to 19.1%. This shows the firm is being run well and is becoming more efficient.
Overall, this shows strong evidence that the company is primed for future success. I think investors should consider buying Rolls-Royce shares today.
