Rolls-Royce (LSE:RR) shares continue to dominate conversations with retail and professional investors. Up 27% in the past year, it’s easy to see why. However, with some thinking the stock’s overvalued, it’s worth following what leading bank research teams and analysts think. Here’s what I’ve noticed.

Plenty of room to rally

The team at Morgan Stanley upgraded its target price from 1,500p to 2,000p a month ago, and has just come out and kept it at the same level. This is interesting because the stock’s down 7% over the past month, but clearly the team still have confidence in its view.

For perspective, the current price is 1,419p, so this reflects a 41% move higher if it would reach 2,000p over the coming year. Of course, this is just one analyst’s view, but it reflects a strongly optimistic outlook that the company could keep doing well despite already having seen a strong move higher.

Interestingly, of the 20 analyst target prices I have access to, the average forecast for the next year is 1,747p. So it isn’t just Morgan Stanley with a positive outlook for the firm.

Adding in my view

The 2,000p target does seem a little stretched, in my opinion. Importantly, I don’t have a negative view on the business. First-half underlying operating profit jumped 46% to £2.5bn, prompting management to raise 2026 guidance to £4.7bn-£4.9bn. Free cash flow’s now expected to reach £3.8bn-£4bn. These are all good signs.

My problem is expectations. At 2,000p, Rolls-Royce would be trading at around 45 times the current consensus forecast for 2027 earnings (44.7p per share). Even using the 2028 estimate of 52.3p, that’s still around 38 times earnings. That’s a punchy valuation for an aerospace and defence manufacturer.

There’s also concern around the Civil Aerospace division. This area remains dependent on flying hours and the health of the airline industry. With oil above $100 a barrel, fuel costs for the industry are shooting higher. Any hindrance here over the winter could have a knock-on impact for Rolls-Royce. Supply chain problems haven’t disappeared either, with Rolls expecting a £150m-£200m cash impact this year.

Allocating cash

Longer term, I like the potential from defence spending, data centres and small modular reactors (SMR). All of these factors could be big enough to increase earnings to the point that the share price rises. But at today’s valuation, good news is expected rather than surprising. For 2,000p to arrive within a year, I think Rolls-Royce needs to keep beating already-high expectations.

Therefore, although I do like the company, I think there are better opportunities out there in the stock market at the moment via more undervalued gems.

Should you invest £5,000 in Rolls-Royce Plc right now?

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Jon Smith has no positions in the shares mentioned.