Rolls-Royce (LSE: RR) shares have been unstoppable in recent times. They’re up 441% in two years and 364% over three! But what about the next five years? Well, this is where things get a bit murkier.
The stock is just off an all-time high at 587p. That doesn’t mean it can’t go higher, of course. But it does mean that there are lofty expectations baked in, with its forward price-to-earnings (P/E) ratio of 27.
Were the FTSE 100 engine maker to miss a beat with its earnings, even slightly, the share price could quickly lose altitude.
Mind you, as a Rolls shareholder myself, I love the company’s trajectory under CEO Tufan Erginbilgiç. It has attractive opportunities due to expanding global aircraft fleets, rising defence budgets, and the long-term potential of small modular reactors (SMRs).
Nevertheless, there are other UK stocks that I think are set for higher growth over the next five years.
AI boom
One of them is Polar Capital Technology Trust (LSE: PCT). Admittedly, this FTSE 250 technology investment trust is also near a record high, with its shares surging 45% in the past year alone.
But given the focus on technology and the quality of its portfolio, I fully expect more gains ahead.
Why? Put simply, we’re in the midst of a powerful technological revolution, with rapid advances being made in artificial intelligence (AI). Even non-tech Footsie blue chips are utilising AI to improve their operations. For example, AstraZeneca is using it to identify small molecules that could become the next blockbuster drugs.
Polar Capital Technology Trust owns many of the firms already benefiting from the rise of AI, including Nvidia and Microsoft. But there are more than just the Magnificent Seven tech stocks. Another top holding is Taiwan Semiconductor Manufacturing (TSMC), the world’s leading contract chipmaker.
This year, TSMC is guiding for mid-20% growth in sales, driven by AI chips. And Wall Street is expecting compounded annual revenue growth of 20% through to 2029!
Elsewhere in the portfolio, I like the prospects of Cloudflare. This edge computing player is arguably the most important internet company that people have never heard of. As of September, 35% of the Fortune 500 were paying Cloudflare customers.
Trading at a discount
The key risk here is the trust’s sole focus on technology. If this sector were to suffer a meltdown, as happened in 2022, then the portfolio and share price would underperform badly.
Another thing to note is that the shares are currently trading at an 11.2% discount to the net asset value per share of the fund. While this could be a bargain hiding in plain sight, there’s no guarantee that the discount will narrow. Indeed, due to the nature of investment trusts, it could always widen.
Looking forward to 2030 though, I expect the AI revolution to advance and productivity gains to start translating into expanding profit margins for some companies. Even the Labour government is now pinning its hopes for UK growth on the technology!
Naturally, there will be periods of volatility ahead, meaning the FTSE 250 trust’s share price won’t go up in a straight line. But I expect it to generate stronger overall returns than Rolls-Royce over the next five years. I think it’s worth considering.
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Ben McPoland has positions in AstraZeneca Plc, Rolls-Royce Plc, and Taiwan Semiconductor Manufacturing. The Motley Fool UK has recommended AstraZeneca Plc, Cloudflare, Microsoft, Nvidia, Rolls-Royce Plc, and Taiwan Semiconductor Manufacturing. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
