Rolls-Royce (LSE:RR.) investors have become used to explosive share price gains in recent years. They’re now in a state of shock as the FTSE 100 engineer continues to bleed value.
At £11.95 per share, Rolls-Royce shares have slumped 11% over the last month. They’re also down 16% from the record highs of £14.20 struck at the start of the month.
Has the bubble burst, leaving the FTSE firm in danger of a prolonged price reversal? Or is current weakness a top dip-buying opportunity for investors?
Why is Rolls falling?
Rolls-Royce shares were always in danger of a sharp correction, in my view. The company’s stunning price ascent — it’s risen more than 1,000% in value over five years — meant it was more vulnerable to a slump if market confidence sank.
And so it’s proved. Rolls’ price drop is higher than the broader FTSE 100’s 7% fall.
But things are more complex than that. More specifically, the firm is highly sensitive to conditions in the airline industry. And the outlook here has worsened dramatically given recent events in the Middle East.
In total, Rolls makes just over six-tenths of operating profit from selling large airplane engines and then servicing them. Customers pay a fixed fee for however many hours the engines are running.
You can see how the business is extremely vulnerable right now. With inflationary pressures rising, demand for flight tickets could fall significantly, impacting engine flying hours. Squeezed airline profit margins as oil (and by extension fuel) costs rise might also dampen new engine orders as carriers cancel or postpone fleet renewal.
Are the shares still too expensive?
The concern I have is that Rolls-Royce’s share price is still expensive despite its ongoing drop. The price-to-earnings (P/E) ratio for 2026 sits at 31.1 times. This is still more than double the long-term average of 15.
With a drawn-out conflict in the Middle East a possibility, this leaves plenty of scope for further price pressure. The thing is, that’s not the only significant threat to Rolls right now. It also faces severe supply chain problems that could impact day-to-day operations and new project delivery. Competitive threats and rising costs as inflation balloons are other notable dangers that could send the stock lower.
I’m also becoming increasing worried about falling AI investment and what this could mean for the business. Data centres require huge amounts of power to run, providing an excellent opportunity in Rolls’ Power Systems division. If the outlook for AI adoption darkens, could Rolls shares fall sharply along with AI stocks themselves?
Final word
As with any share, there’s both risk and opportunity here. And there are some potential catalysts that could drive Rolls shares higher again. Geopolitical events (including those in the Middle East) could continue to support the firm’s Defence division. And of course the long-term outlook for the civil aerospace sector remains robust as traveller numbers steadily grow.
Yet I won’t be buying the FTSE company for my own portfolio. Ultimately, Rolls-Royce remains far too expensive for me, and especially in the current climate. I’ll leave it to more risk-tolerant investors to pick up its shares.
