Since the pandemic, Rolls-Royce Holdings (LSE:RR.) shares have been the darling of the FTSE 100. The aerospace and defence group is now (20 October) worth over £90bn. When Covid-19 closed our skies and we were told to stay at home, it nearly went bust.
With all extended share price rallies, investors want to know when it might end. Of course, nobody knows for sure but a review of some important financial measures — and a look at the prospects for its key markets — could provide some clues.
For a bit of fun, I decided to consult ChatGPT. With all the hype surrounding artificial intelligence, it’s easy to get carried away and think that it has all the answers.
In the early days of computers, there was a phrase — Garbage In, Garbage Out (GIGO) – that was often quoted. Today, I think it’s still relevant and could equally apply to ChatGPT and other large language models.
The output from these programs comes from processing huge volumes of publicly available data. But users have no way of knowing whether the sources they are using are reliable. However, its results should be treated with caution. And I see it as a resource to only use for the most basic questions when researching potential investments.
One problem is that it produces different results depending on the way in which a question is asked. Here are three examples. For all of them, I requested a one-sentence answer.
Q&A
Q1: Do you think Rolls-Royce shares are over-priced?
ChatGPT: “At current levels, many analysts consider Rolls-Royce shares fully valued rather than over-priced, given their strong recovery but limited short-term upside after a sharp rally.”
Q2: Do you think Rolls-Royce shares are under-priced?
ChatGPT: “Given its strong earnings growth, expanding defence and aviation contracts, and improving balance sheet, Rolls-Royce shares still appear undervalued relative to their long-term potential.”
Q3: Do you think Rolls-Royce shares are fairly valued?
ChatGPT: “At current levels, Rolls-Royce shares appear close to fairly valued given their strong turnaround, improved profitability, and cash flow outlook, though much of the recovery optimism already seems priced in.”
What does this tell me?
There you have it. Depending on which answer you believe, the group’s shares are either “fully valued”, “close to fairly valued” or “undervalued”.
Personally, I think the group’s going to have to issue some sort of earnings upgrade or announce a major contract win for the shares to move much higher. This could come on 13 November, when the group’s due to release its next trading update. We shall see.
However, I’m optimistic about the group’s long-term potential. That’s why I’m holding on to my shares and why others could consider adding them to their own portfolios. Although we won’t know for sure until the next decade, I believe its small modular reactor programme (mini nuclear power stations) has huge potential. And it makes sense to me that the group’s looking to return to the narrowbody aircraft market.
Until then, I doubt we will see the stellar share price growth of the past five years or so. And the dividend isn’t generous enough to attract income investors. However, the group has a reputation for engineering excellence and operates in three distinct – but growing – sectors. That’s why I believe the shares are worth considering. And I don’t need ChatGPT to tell me that.
