Bad news for Rolls-Royce holdings (LSE:RR.) shares are down 22% from February’s 52-week high. A drop of more than 20% is technically considered a failure.

The good news, however, is that shareholders who purchased the stock at the end of March 2024 are still expecting an boost of 160%. That’s enough to turn a £5,000 investment into a chilly £13,200. Not bad for a stock price that just dropped, right? Oh, and that’s thanks to 950% growth over the last five years.

Is the future still rosy?

Why did Rolls-Royce shares fall so much? The key is the conflict in the Middle East and rising oil prices. Aviation is already suffering and we don’t know how long it will be before aviation returns to normal. So should we assume that’s it and the Rolls share price will get back on track once the fighting is over? I think this might be a mistake.

Stock price growth will inevitably sluggish. A repeat of the same boost in multiple bags over the next five years was never very likely. But a key question remains as to when any rapid growth in economic participation appears to be coming to an end. What will happen next? Growth shares often get too high, become overvalued, and then reverse. Ultimately, the price is set to reflect the long-term value of the company’s underlying performance.

This performance looks really impressive at the moment. Announcing results in February, Rolls said it expected operating profit of £4.9 billion to £5.2 billion and free cash flow of £5 billion to £5.3 billion by 2028.

Reasons to be careful?

However, I believe we should be cautious on two key issues. One of them is valuation. We are currently looking at a projected price-to-earnings (P/E) ratio of 30, which is approximately twice as high as in the long term FTSE100 average. True, forecasts suggest that number should drop to 22 by 2028. And there’s certainly a smaller premium for growth stocks in that.

The second unknown is where the profit growth will come from in the years after 2028. Artificial intelligence will continue to boost energy demand. And that means huge future profits from Rolls-Royce’s next generation of miniature nuclear reactors. At least that’s part of the conventional wisdom.

However, we do not know yet what the amount of this profit will be or when it will occur. It looks like this won’t happen until at least 2030. We must remember that Rolls-Royce’s revenues are largely dependent on its aviation business. And I don’t see that changing for some time.

What to do?

I think this is a great time to take stock and re-value Rolls-Royce shares because it does seem to be a time of transition. I also understand why we remain enthusiastic about the future. However, I think cautious investors should consider other homes in exchange for investment cash.