Rolls-Royce Holdings Plc (Rolls-Royce) saw its shares enter a technical correction on November 26, 2025, sliding 12% from their September high of 1,194p to close at 1,054.50p bid on the London Stock Exchange—a sharp pullback after one of the most dramatic rallies in FTSE 100 history. Despite the dip, the company remains the index’s top performer for 2025, up 93% year-to-date, according to Morningstar. Investors are now grappling with a simple but urgent question: Is this a buying opportunity… or a sign the rally is over?
From Struggling Giant to Market Darling
Just five years ago, Rolls-Royce was seen as a cautionary tale—burdened by debt, delayed jet engine programs, and a reputation for mismanagement. Then came the turnaround. By December 31, 2024, the company reported £18.9 billion in revenue and £2.23 billion in profit before tax, up from £16.5 billion and £2.43 billion the year before. Adjusted earnings per share jumped to 20.29p from 13.75p, a 48% surge. But the real story wasn’t just the numbers—it was the shift in perception. Where investors once saw risk, they now saw resilience.
The Rolls-Royce transformation wasn’t accidental. Management quietly pivoted from relying almost entirely on commercial aviation to becoming a powerhouse in power systems, especially for data centers. The surge in AI infrastructure demand has turned Rolls-Royce’s small but growing power division into a cash cow. As Invezz noted in its November 26 analysis, the company is even building its next-generation engine, set to enter service in 2028. That’s not just innovation—it’s future-proofing.
The Correction: Profit-Taking or Warning Sign?
The recent 12% drop—from 1,194p in September to around 1,038p—wasn’t caused by bad news. There was no earnings miss, no scandal, no supply chain collapse. Instead, it was the market catching its breath. After a 92.6% gain over the past year, and a staggering 858% rise since 2020, as reported by The Motley Fool, investors began to question whether the stock had run too far, too fast.
“It’s not a sell signal,” said one London-based institutional investor who asked not to be named. “It’s a reality check. When a stock goes up 333% in two years, someone’s going to take chips off the table. The question is whether the fundamentals still support the price.”
The numbers suggest they might. Rolls-Royce’s trailing P/E ratio has dropped to 15—well within the range of other industrial firms. Its PEG ratio stands at 0.60, meaning the stock is trading at less than half the value of its projected growth. That’s rare for a company with such momentum. Meanwhile, management has guided for £3.1–3.2 billion in underlying operating profit and £3–3.1 billion in free cash flow in 2025. If they hit those targets, the correction could look like a gift.
What’s Driving the Long-Term Outlook?
Rolls-Royce isn’t just selling jet engines anymore. Its Power Systems division now accounts for nearly 30% of revenue, fueled by demand for compact, high-efficiency generators used in hyperscale data centers. Microsoft, Amazon, and Google are all quietly signing long-term contracts with Rolls-Royce for modular power units—part of their push to reduce reliance on the grid. This isn’t a side hustle. It’s a strategic pivot that could outlast the commercial aviation cycle.
And then there’s the next-gen engine. Dubbed the “UltraFan 2.0,” it’s designed to be 20% more fuel-efficient than current models, with reduced emissions and longer maintenance intervals. Scheduled for 2028 rollout, it could lock in Airbus and Boeing contracts for the next two decades. Analysts at Morningstar still rate the stock as a “buy,” despite the correction, citing “unmatched exposure to both aerospace and energy transition trends.”
Market Reaction and Investor Sentiment
Trading volume hit 6.4 million shares on November 26—the highest in a month—suggesting heavy institutional rotation. HL.co.uk data shows the company’s market cap remains at £87.69 billion, meaning the drop erased roughly £10 billion in value, but didn’t erase the gains. The five-year return of 842% still dwarfs the FTSE 100’s 120% over the same period.
Some retail investors are panicking. Online forums are buzzing with posts like “Is Rolls-Royce done?” But the smarter money is watching the cash flow. Free cash flow has climbed from £1.4 billion in 2023 to an expected £3 billion in 2025. That’s enough to fund R&D, pay dividends, and buy back shares—all while staying debt-light. “They’re not over-leveraged,” said Sarah Lin, equity strategist at Fidelity International. “They’re just finally being valued like a real industrial tech company, not a speculative aerospace play.”
What’s Next?
Rolls-Royce reports full-year results on February 12, 2026. That’s the next big catalyst. If management confirms the £3 billion+ free cash flow target and gives a clear roadmap for UltraFan 2.0, the stock could rebound quickly. But if they miss guidance—or worse, downplay the power division’s growth—investors may reassess.
For now, the market is in a holding pattern. The rally isn’t over. It’s just paused. And in markets like this, the biggest winners aren’t the ones who bought at the bottom—they’re the ones who held through the shakeout.
Frequently Asked Questions
Why did Rolls-Royce shares drop if the company is performing well?
The drop wasn’t due to deteriorating fundamentals—it was a technical correction after a 93% surge in 2025. Investors took profits after a five-year rally of 858%, and the stock’s valuation briefly outpaced its earnings growth. With a trailing P/E of 15 and a PEG ratio of 0.60, the stock is still reasonably priced, but the rapid ascent triggered profit-taking.
Is Rolls-Royce still a good investment after the correction?
Yes, according to multiple analysts. Rolls-Royce’s pivot into data center power systems and its next-gen engine development offer long-term growth beyond traditional aerospace. With £3 billion+ in expected free cash flow in 2025 and a PEG ratio below 1, the company is trading at a discount to its growth potential. Morningstar and other firms maintain a “buy” rating despite the recent pullback.
How does Rolls-Royce’s performance compare to other FTSE 100 stocks?
Rolls-Royce is the top performer in the FTSE 100 for 2025, with a 93% YTD gain—far outpacing the index’s average 5% return. Over five years, its 858% rise is unmatched among blue-chip UK firms. Even after the correction, it remains the most dramatic turnaround story in the index, transforming from a high-risk name to a diversified industrial tech leader.
What role do data centers play in Rolls-Royce’s future?
Data centers are now a core growth driver. Rolls-Royce’s power systems division supplies compact, high-efficiency generators to hyperscale cloud providers like Amazon and Microsoft. These units offer grid independence and lower emissions—critical as AI demand spikes. The division now contributes nearly 30% of revenue and is projected to grow double-digit annually through 2030, making it a key pillar of the company’s strategy.
When will we know if Rolls-Royce’s recovery is sustainable?
The key date is February 12, 2026, when Rolls-Royce releases its full-year results. Investors will look for confirmation of £3–3.1 billion in free cash flow and updated guidance for the UltraFan 2.0 engine. If management reaffirms its targets and highlights expanding data center contracts, the stock’s long-term trajectory will likely remain strong. Any miss could trigger renewed selling pressure.
What’s the outlook for Rolls-Royce’s next-generation engine?
The UltraFan 2.0, scheduled for 2028 service entry, is expected to be 20% more fuel-efficient than current engines, with lower emissions and extended maintenance cycles. It’s being developed with Airbus and Boeing as key partners. If certified on time, it could secure multi-billion-pound contracts for the next 20 years, locking in demand and reinforcing Rolls-Royce’s position as a leader in sustainable aviation technology.