Rolls-Royce (LSE: RR) shares have fallen 10% in the last month. That’s a modest dip, relative to their recent stellar run. But is it a rare opportunity to buy them at a reduced price?
The tragedy of the war in Iran has driven up energy prices, disrupted flights and rattled the global economy. After a brilliant run where the shares only went one way, the FTSE 100’s star performer suddenly has multiple forces pulling it in different directions.
Buying opportunity or threat?
Let’s start with the positives for the group, if not the world. Rolls-Royce has a significant defence division, and this terrible geopolitical instability should boost military spending. With European nations already under pressure to rearm, that side of the business could see increased demand.
Rolls also has long-term growth potential in building small modular reactors, better known as mini-nuclear plants. If the conflict triggers a prolonged oil and gas shock, governments may be tempted to order fleets of mini-nukes to secure reliable domestic power sources. The group’s power systems division could benefit too, particularly if energy resilience becomes a bigger priority for industry.
But there are just as many risks. The biggest is aviation. Rolls-Royce makes its money not just from selling engines, but from long-term servicing contracts based on hours flown. If planes don’t fly, it doesn’t get paid.
That’s a real concern right now. British Airways has suspended flights to Dubai until at least 31 May. If disruption drags on or spreads, global flight activity could take a hit. That would directly impact Rolls-Royce’s most important revenue stream. There’s also the broader economic risk. If soaring oil prices trigger a global slowdown, demand for air travel could weaken further. That would be a double blow.
Then there’s a more indirect threat. Rolls-Royce has been positioning itself to benefit from the rapid growth of data centres, supplying power systems to support the boom in artificial intelligence. But if that AI-driven investment cycle stalls, demand could fall short of expectations. Funding AI could be harder if interest rates rise and investor sentiment plummets. So that’s another variable investors need to consider.
Valuation has fallen
Rolls-Royce shares have been on a remarkable run, but have looked expensive for some time. The price-to-earnings ratio hit 65 after 2025’s blockbuster results. After recent troubles, it’s dipped to 40. Cheaper, but far from cheap. So where does that leave investors?
Rolls-Royce is juggling a lot of moving parts. Defence and energy could lift the stock. Aviation and the wider economy could drag it down. The outcome depends heavily on events in the Middle East.
The company has transformed itself under CEO Tufan Erginbilgic. I think the shares are well worth considering with a long-term view, and I’m not going to sell my own stake. But I won’t rush to buy more at today’s valuation. Investors could consider drip-feeding money in, or better still, wait to see if market volatility throws up a better entry point.
Many FTSE 100 stocks have been a hit a lot harder than Rolls-Royce. I can see plenty more opportunities out there, and they’re nearly all cheaper too…
