Rolls-Royce stock price has sold off substantially in the past few weeks as the momentum it had earlier this year stalled. It tumbled to 1,404p on Wednesday, down by 11.4% from the highest point this year, meaning that it is in a deep correction. So, is this drop a good buying opportunity?
Rolls-Royce Holdings has dropped amid profit-taking
RR stock has dropped into a correction recently as investors started to book profits after its strong surge in the past few years. The initial surge saw it move from 71p in 2021 to 1,585p in August.
It soared as demand for all of its products rose. Its civil aviation saw substantial orders as the industry rebounded from the pandemic. This is important because the division accounts for about 50% of its total revenue.
Its defence business has also benefited from the ongoing spending by the UK, European countries, and the United States. Most notably, the company’s power business is seeing strong demand from its data center clients.
Recently, however, the stock has lost momentum, mirroring the performance of the FTSE 100 Index, which has dropped from 10,986 in August to 10,458 points today. Top UK companies like Lloyds Bank and Barclays have all retreated.
Rolls-Royce also moved in line with the performance of its top competitors. GE Aerospace, its biggest competitor, has dropped from $387 in August to $303 today. RTX, which owns Pratt & Whitney, has dropped from $225 to $180.
In addition to profit-taking, there have been concerns about its valuation, which has remained at an elevated level in the past few months. Rolls-Royce has a trailing PE ratio of 40.8 and a forward multiple of 34, which is quite rich for an industrial company. In contrast, the faster-growing Micron and SanDisk have forward multiples of less than 10.
At the same time, investors are concerned about the company’s small modular reactor (SMR) business. Other leading SMR stocks, such as Oklo and NuScale, have fallen sharply this year as investors have reset their expectations. Rolls-Royce will host an event later this month focused on its SMR unit, so investors will want a clear view of its revenue and margin pipeline.
On the positive side, the company has higher expectations in terms of revenue and profits. The last earnings report showed that its revenue jumped to over 11.2 billion pounds in the first half of the year from 9.05 billion in the same period last year. Its profit before tax also jumped to 2.49 billion from 1.68 billion, and the management expects the trend to continue.
Rolls-Royce share price technical analysis
Rolls-Royce stock chart | Source: TradingView
The daily chart shows that the RR stock price has tumbled in the past few months. It has dropped from a high of 1,584p in August to the current 1,404p.
The stock has moved below the 23.6% Fibonacci Retracement level and the 50-day moving average. At the same time, the Relative Strength Index (RSI) has continued moving downwards.
Therefore, the stock will likely continue falling as sellers target the 50% retracement level of 1,325p. Such a move will be a 5.72% drop from the current level. On the flip side, a move above the resistance level of 1450p will invalidate the bearish outlook.
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