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Thanks to a 15-fold rise in its share price, Rolls-Royce’s (LSE:RR.) market cap has exploded in recent years. Today, the company is worth a whopping £92bn, making it the sixth-largest company in the UK’s FTSE 100 index. It can get bigger though, according to CEO Tufan Erginbilgiç. He recently told the BBC that he believes Rolls-Royce could one day be the largest company on the London Stock Exchange (LSE).
A nuclear energy powerhouse
Erginbilgiç’s bullish view is largely based on Rolls-Royce’s operations in the nuclear energy industry. More specifically, it’s related to the company’s expertise in the small modular reactor (SMR) space.
SMRs are a new generation of nuclear reactors that are significantly smaller than traditional nuclear power plants. Given their smaller size, they can be deployed closer to the grid and can be used to power a range of industrial applications including data centres for artificial intelligence (AI).
Erginbilgiç believes that the world will require 400 SMRs by 2050. And he expects his company – which already supplies reactors that power nuclear submarines – to dominate the market.
There is no private company in the world with the nuclear capability we have.
Rolls-Royce CEO Tufan Erginbilgiç
It’s worth noting that each SMR costs around £2.2bn. So, if Rolls-Royce was to dominate the market, it could be looking at significantly higher revenues in the future.
Long-term growth potential
Is the company capable of becoming the largest business on the London Stock Exchange, though? Potentially.
Today, the largest company is pharma giant AstraZeneca. It has a market cap of a little over £170bn at present.
I don’t think Rolls-Royce will overtake this company in market cap in the near term (I expect AstraZeneca to get bigger itself in the years ahead). But taking a five-to-10 year view, I think it could happen if Rolls-Royce has success with SMRs.
Already, the company has signed SMR deals with Great British Energy – Nuclear, Czech utility company ČEZ Group, and a few other organisations. There could be plenty more deals to come as interest in the technology is high right now.
It should be noted, however, that SMRs are a new – and largely unproven – technology. Today, there are only a few in operation across the world.
So, there’s absolutely no guarantee that Rolls-Royce will have success here. It’s possible that SMRs may not take off in the way that Erginbilgiç expects them to.
Another issue to consider is competition. Currently, there are a few different companies working on SMR technology including NuScale Power, X-Energy, and EDF, so Rolls-Royce may not end up dominating the market.
Worth buying today?
I’ll point out that while I do see long-term potential in Rolls-Royce shares, I don’t necessarily see them as a Buy today. Right now, they look quite expensive valuation-wise (the forward-looking price-to-earnings (P/E) ratio is about 42) and after an exponential share price rise, there’s the risk of some profit taking in the near term.
They could be worth considering on a pullback, however. Taking a long-term view, the story looks attractive, in my view.
