Here’s why Rolls-Royce share price is falling and what may happen next

Rolls-Royce's share price remains under pressure this week, falling to its lowest level since July 31st. The stock has now dropped nearly 9% from its yearly high, and technical indicators point to further downside, potentially toward 1,330p, before a rebound takes hold.

Rolls-Royce Holdings is facing some major pressures

RR stock has crashed sharply in the past few days, helped by the ongoing tensions in the Middle East that may impact its margins as the prices of key products continue rising. 

The stock has also dropped amid the ongoing woes in the Small Modular Reactor (SMR) industry, where it is a major player in the industry. While the industry is expected to be a huge one, investors have started to question their valuation.

For example, Oklo stock has dropped to $38.5, its lowest level since May 19 last year. It has slipped by 80% from its highest point since October last year. 

Also, NuScale Power stock dropped to $9.21, down sharply from a record high of $57.23. Nano Nuclear Energy has fallen to $17 from last year’s high of $60.78, while MWX is down by over 30% from its peak. 

Rolls-Royce is one of the top companies in the industry and has already inked deals with the UK and Swedish governments. While these deals are huge ones, it is unclear when the company will turn free cash flow positive.

Additionally, the company has become a highly overvalued name, with its market capitalization rising to over £120 billion. It trades with a forward price-to-earnings ratio of 33, higher than the sector median of 20. This figure is also higher than its competitors, including GE Aerospace.

Rolls-Royce other businesses are doing well

The most recent results showed that Rolls-Royce Holdings’ business was doing well, and this trend may continue in the foreseeable future. Its revenue jumped to £11.27 billion in the first half of the year, up by 26% YoY. Its gross margin rose from 28.4% to 30.1%, with its operating profit rose by 46% to £2.53 billion.

The three core businesses are thriving. Its aerospace business is seeing a surge in demand, with its engine deliveries rising by 18% to 279. This division’s revenue jumped by 29% to £6.1 billion. The defense sector revenue jumped by 17% to £2.48 billion, while the power segment made £2.6 billion, up by 28% YoY.

Rolls-Royce share price technical analysis

RR stock chart | Source: TradingView

The daily chart shows that the RR stock has dropped sharply in the past few weeks. It dropped from a high of 1,586p in August to the current 1,454p. It has moved below the lower side of the descending channel. Moving below that level suggests that it has invalidated the bullish flag pattern. 

It has also dropped below the important support level of 1,503p, its highest point on July 6 this year. Also, it has dropped below the 25-day Exponential Moving Average (EMA). 

Therefore, the stock may continue falling, potentially to a low of 1,330p, its lowest level in July this year. Such a move would be a 8.8% drop from the current level. Later this year, the stock will likely resume the uptrend, and potentially to 2,000p.