As Rolls-Royce (LSE: RR.) shares surged past the £13 mark and to yet another all-time high, it led a few onlookers to ask questions about how much higher the share price could climb.
In spite of the pessimism from some quarters, three leading analysts have raised their price targets in recent days. The increase in expectations over the next 12 months came with some interesting reasoning, including a hint that Rolls-Royce might be something of an artificial intelligence play too.
Targets
The three analysts to increase price targets were Goldman Sachs, Deutsche Bank, and RBC, raising their price targets to 1,350p, 1,325p, and 1,400p, respectively.
A quick comparison to the Rolls-Royce share price (at 1,285p as I write on 20 January) throws up an obvious question: why care about forecasts of a rise of just a few percent or so?
The truth is: all forecasts should be taken with a pinch of salt. No one can predict the future. And even the most well-reasoned predictions can turn out to be completely wrong.
It is, however, a sign that the momentum of Rolls-Royce shares is that of an unstoppable runaway train. This is a stock that has exploded 20 times in value from a low point in 2022. The firm trades at around 40 times forward earnings. It would be natural to see a lot of caution around the stock, but we’re not seeing that.
Another reason to pay attention to analysts is – rather than any specific share price target that is being thrown around – is the analysis itself. It’s the job of analysts to do deep-dives on these companies and that can unearth some significant insights.
Wild promises
The biggest point to catch my attention was the growing role of Rolls-Royce in artificial intelligence.
The engineering firm has little exposure to the AI industry as a whole. But, it might be turning into something of a ‘picks and shovels’ play. In other words, it can make a lot of money selling the proverbial tools in a gold rush.
Training large language models requires tonnes of energy – and it needs to be very reliable too. As it happens, Rolls-Royce’s Power Systems division is racking up orders, notably making a multi-million dollar investment in Minnesota. Income from this area grew around 50% last year.
While the short-term future of AI is uncertain – and the lack of return on investment so far is a risk – it’s hard to not see this technology being an important part of the world in the future. And if this fantastic new technology makes good on some of the wild promises that have been made, this could be a growing income stream for Rolls-Royce for years to come. I’d call the stock one to consider.
