Rolls-Royce Holdings plc has enjoyed a sharp share price rebound, with investors pointing to recovering long-haul travel demand and heightened geopolitical tension as key drivers.
Even after that run, some analysts argue the company remains undervalued, citing skepticism that recent earnings strength can be sustained over time.
The central case is that multiple long-duration demand themes are gathering pace simultaneously, supporting cash generation across civil aerospace, defense, power systems and newer nuclear initiatives.
Power systems seen as structural winner
A major focus is Rolls-Royce’s power systems unit, which supplies engines and generation equipment used for critical backup applications.
With data centres expanding rapidly and tolerance for downtime falling, demand for emergency power installations is expected to grow as AI workloads and always-on services become standard.
Rolls-Royce is described as one of the largest suppliers in the segment, holding a meaningful share of global data centre backup installations.
Supporters argue the mtu product line can stand out because it can run on HVO biofuels, positioning it well for tightening emissions rules and net-zero commitments.
That capability is viewed as a differentiator as customers seek lower-emissions options without compromising reliability for 24/7 operations.
Small nuclear segment carries long-term optionality
The company’s small modular reactor activity remains a tiny slice of current revenue, which is why some investors believe the market underestimates its long-term contribution.
Backers point to government support and international partnerships as early signs that the segment could scale over time, even if timelines remain long and execution risks are real.
The argument is that being selected in a national competition and securing state backing can help validate the technology and improve the pathway to commercial deployment.
With additional talks and partnerships referenced across Europe, bulls see potential for multi-year investment pipelines that could become material later in the decade.
Defense demand expected to accelerate
Optimism is also building around defense, with expectations that procurement rises as NATO members move toward higher spending targets over the coming years.
Given Rolls-Royce’s exposure to land, naval and air platforms, supporters believe the order environment could remain strong, potentially stretching production capacity.
One frequently cited signal is a recent customer order for mtu tank engines, alongside management commentary that suggested demand is pressing against supply.
Rolls-Royce’s CEO, Jörg Stratmann’s, comments included: “…. have recently significantly expanded our capacity for the development and production of urgently needed mtu drive systems for military vehicles …”
Valuation debate remains open
The bullish view is that the market is still discounting durability, with doubts over margins, timing of nuclear approvals and the pace of capital spending needed to meet demand.
Skeptics point to regulatory hurdles in nuclear, potential redesigns, and the risk that forecast growth rates for data centre power demand cool if macro conditions weaken.
Supporters counter that a more diversified earnings mix, improving operational execution, and long-cycle demand in defense and power systems can reduce reliance on any single market.
For investors, the debate now hinges on whether the recent rally represents a peak in optimism, or merely an early repricing of a business entering a stronger multi-year cycle.
