Rolls-Royce shares are on a path to 2,000p, but a key technical risk remains

Rolls-Royce share price has held steady near its all-time high, helped by the ongoing demand for its products in areas like civil aviation, defense, and power. This pause could be the calm before the storm ahead of a renewed rally as bulls target the key resistance level of 2,000p.

Analysts expect Rolls-Royce revenue and profits to grow

Rolls-Royce Holdings is doing well, helped by the ongoing demand of its products in the civil aviation, power, and energy markets.

Its most recent financial results showed that its operating profit jumped by 46% in the year’s first half of the year to £2.5 billion. Its free cash flow soared by 24% to £2 billion, with its operating margin going up by 3.1 basis points to 22.5%.

These metrics, together with the rising revenue, happened in a difficult period for the company. Aluminium and other metals jumped in the first half as the US-Iran war restarted. At the same time, there was some travel disruption, which impacted its civil aviation business.

The company is also benefiting from other areas. For example, it is increasing its power systems capacity to take advantage of the growing data center industry. Also, it plans to boost the maintenance, repair, and overhaul (MRO) capacity across its business.

The consensus report on its website shows that analysts expect the company’s growth is expected to keep growing, which may help to justify its valuation. Its annual revenue is expected to hit £22.7 billion, with its free cash flow growing to £3.8 billion.

Looking ahead, the revenue in 2027 is expected to jump to £25.3 billion, followed by £27.8 billion a year later. Also, the underlying profit-before-tax (PBT) is expected to jump to £4.8 billion next year and £5.5 billion a year later. In the past few years, Rolls-Royce has done better than analysts' estimates.

A key risk for the company is that Rolls-Royce's share price is that it is highly overvalued. HL data shows that the company has a price-to-earnings ratio of 52. Its forward PE ratio has moved to 33.2, higher than the FTSE 100 Index average of 17. It is also higher than the S&P 500 Index average of 20, and even that of popular companies like Nvidia and Micron.

The forward PE ratio has a ten-year forward price-to-earnings ratio of 18.4, much lower than the current level.

RR stock chart | Source: TradingView

The daily chart shows that the RR stock has been in a strong upward trend in the past few months and is now hovering near its all-time high. It has moved above the key resistance level of 1,510p, its highest level on July 6, and then retested it. Moving above that level invalidated the double-top pattern.

The stock has remained above the 100-day Exponential Moving Average (EMA), a sign that bulls are in control. Also, the Relative Strength Index (RSI) has continued rising and is hovering near the overbought level.

Therefore, the path of the least resistance is upward, with the next key target to watch being the psychological level of 2,000p. The risk, however, is that the stock has formed a rising wedge pattern that may lead to a pullback.