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The Rolls-Royce (LSE:RR) share price, and the stock market in general, has welcomed a bit of a rally over the last few days. After early data showed that existing vaccines will be effective against the Omicron variant, investors’ nerves have somewhat calmed… for now.

However, current UK infection rates are nearing all-time highs, with Omicron acting as a driving force. As such, the probability of another round of lockdowns is climbing. And if it’s anything like what we saw in 2020, Rolls-Royce could be in for further disruption. But can the company prevail?

Lockdown potential

Rolls Royce has several sources of income as its divisions, focus on a variety of sectors. However, revenue from its aerospace segment represents a large chunk of its cash flow. So it’s not surprising that after travel restrictions were put in place in 2020, this source of income quickly, albeit temporarily, dried up. That’s undoubtedly why the Rolls-Royce share price collapsed in March last year.

Since then, the stock has made a slight recovery. But its 12-month performance is still basically flat, and it continues to trade below pre-pandemic levels. Yet the underlying business has made some encouraging progress, in my opinion.

Looking at today’s trading update, free cash flow is on the rise, thanks to recovering order volumes. As such, management forecasts that it will come in higher than its initial 2021 target of £2bn.

Meanwhile, the company has undergone a major structural overhaul that has delivered over £1bn of savings so far this year. Combining that with a further £2bn of cash from the disposal of non-core assets, Rolls-Royce’s balance sheet is looking much stronger than at the start of 2020. At least that’s what I think.

This is undoubtedly encouraging news, but is it enough to survive another round of lockdowns if harsher restrictions were brought in?

2022 could be a challenging year

Assuming the worst-case scenario, 2022 might see the return of both travel and lockdown restrictions. Needless to say, this could reverse much of the solid recovery progress made by the aerospace industry. And it would likely once again disrupt Roll-Royce’s supply chain for all its divisions, as well as reduce demand for its services.

The increased cash balance does provide the firm with more flexibility than the previous time. However, that capital might not last long, especially since £300m of original equipment expenses are now expected to land in 2022. Should Rolls-Royce’s revenue stream once again evaporate, and the cash reserves get depleted, then I think it’s likely the share price will take a tumble.

So can the stock survive?

All things considered, while there may be volatile times ahead, I believe Rolls-Royce is capable of persevering. However, should the worse come to pass, even if the business survives, it may be years before its share price can return to its former glory.

Personally, I think there are far better investment opportunities for my portfolio elsewhere.

Zaven Boyrazian has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.

The Royal Mail (LSE: RMG) share price has jumped around 14% since the beginning of November. But I think the stock remains undervalued, despite this performance. 

Indeed, shares in the delivery company remain below their 52-week high of 606p. Over the past 12 months, the stock has returned 46%, excluding dividends. 

Growth returns

To understand why Royal Mail has performed so well over the past year and continues to look undervalued, in my opinion, I need to highlight how the City’s growth expectations for the business have developed over the 12-month period. 

This time last year, analysts had pencilled in earnings per share of 9p for the firm in its 2022 financial year. Analysts were also forecasting earnings of 18p for fiscal 2023. 

However, a year later and analysts are forecasting earnings per share of approximately 61p for this financial year and fiscal 2023. 

The reasons behind the upgrades are twofold. First of all the company’s revenue performance has been better than expected. Parcel delivery volumes have continued to exceed expectations as consumer trends developed during the pandemic have persisted. 

The company has also reduced costs and improved efficiency faster than expected. 

These twin tailwinds have catapulted profits higher, and shareholders are reaping the rewards. As well as the capital gains registered by the stock, management has also outlined plans to return £400m to shareholders with dividends and a share buyback.

Using these figures, the stock currently yields 4.7%. And based on City growth estimates, the Royal Mail share price is currently selling at a forward price-to-earnings (P/E) multiple of 7.3. Its five-year average P/E is closer to 10. 

The outlook for the Royal Mail share price 

Considering the current trends in the parcel delivery market and Royal Mail’s progress in cutting costs and improving efficiency, I think the company has enormous potential.

This potential, as well as the firm’s current valuation, are the reasons why I think the stock is undervalued. 

That said, the company does face several risks and challenges. These include rising labour costs and the supply chain crisis. Both of these issues could significantly impact the group’s overall cost base, reducing overall profitability and growth. I will be watching to see how these affect the corporation as we advance. 

I will also be keeping an eye out for Royal Mail’s progress against competitors. The delivery market is only becoming more competitive, so the firm needs to keep ahead of its rivals or it could be left behind. 

Still, even after taking these risks into account, I think the company has a lot of scope to grow over the few years. Management’s plans to reward shareholders with extra cash also suggest that further cash returns could be on the cards as profits rise. Based on these factors, I would buy the shares for my portfolio today. 

Rupert Hargreaves has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.

The realm of metaverse stocks is a relatively new concept to investors. But it’s already grabbing plenty of attention. The idea of creating a persistent 3D virtual environment through the internet is quite an exciting and ambitious goal. And achieving it will require some serious technological innovation.

With that in mind, what are the best metaverse stocks to invest in? A common go-to answer is the recently re-titled Meta Platforms (Facebook). But are there more promising opportunities elsewhere?

A leader in graphical chips to power the metaverse

Designing a graphics processing unit (GPU) is an arduous task. That’s why there are only a handful of graphic card companies out there, the king of which is arguably Nvidia (NASDAQ:NVDA). Its technology is often synonymous with gaming. But its chips are being used throughout multiple industries, including cloud computing, artificial intelligence, and even self-driving cars.

Over the last decade, this stock has risen more than 8,500%! And even during the past 12 months, it continues to grow at an impressive triple-digit rate. That’s hardly surprising given the enormous and ongoing demand for Nvidia’s technology. And it’s why, to me at least, this stock is a prime candidate as a metaverse investment for my portfolio, although I’m not buying just yet.

The company is in fierce competition with Advanced Micro Devices, which has also begun tapping into similar target markets. The battle between these tech titans is unlikely to end any time soon. And it’s possible Nvidia could find it difficult to expand its market share, especially since its recent attempt to acquire Arm is in the process of being blocked by regulators. Nevertheless, I remain tempted by this firm’s track record.

A metaverse stock solving the building problem 

Modelling, unwrapping, and texturing 3D environments is a time-consuming process that’s easily one of the primary reasons video games take several years to make. As someone who previously worked in this industry, I believe building the metaverse using this traditional route is simply not a viable approach. That’s what makes Matterport (NASDAQ:MTTR) so intriguing.

This young business has developed its own photogrammetry technology that can be used from an iPhone. In simple terms, it deploys artificial intelligence to construct 3D environments by scanning real-life locations with a camera. A process that would take hours for an experienced 3D artist could take minutes for someone on their phone.

It’s undoubtedly impressive technology. But is there a viable business here? Matterport sells its software as a service through monthly subscriptions. This generates a recurring revenue stream growing at an impressive double-digit rate. Both are desirable traits, in my opinion.

However, like most technology stocks, it remains an unprofitable venture. And after only recently becoming minted as a public company, I think it’s a bit early to add it to my portfolio. But I’ll be closely watching Matterport moving forward.

Zaven Boyrazian has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.

The TUI (LSE: TUI) share price has significantly underperformed the market over the past year.

Since the beginning of December 2020, the stock has returned just 11%. In comparison, the FTSE All-Share index has returned around 17% over the same time frame, including dividends. 

It is clear why the company has been struggling. The coronavirus pandemic has gutted the global travel industry, and it does not look as if this disruption will come to an end anytime soon. 

TUI has been bailed out three times already by the German government. Unfortunately, it was already facing significant challenges in the run-up to the pandemic. It had a large amount of debt and relatively weak profit margins.

What’s more, the travel industry tends to be unpredictable in nature, so TUI had always struggled to report consistent earnings. 

However, some analysts and investors have highlighted the stock as an excellent investment to own to play the global economic recovery, despite the company’s troubles. 

TUI share price risks

I am not so sure. As I noted above, the company was already in a difficult position before the pandemic. It is now in an even worse situation.

Even though it has been bailed out multiple times, its balance sheet is relatively weak. Moreover, each bailout came with a new set of restrictions such as limitations on dividend payments and management bonuses. 

Nevertheless, I do think it is likely that the group will see an increase in revenues over the next 12 months if the world continues to open up. In the most optimistic scenario, sales will rebound to 2019 levels. This would allow the corporation to reduce debt and move on from the pandemic. 

I think it is unlikely this scenario will play out. Travel restrictions continue to play a critical role in controlling the spread of the virus worldwide. Until the pandemic is truly under control, it seems likely some form of travel restrictions will remain in place. 

Treading water 

This suggests bookings at TUI and other travel operators will remain depressed. As such, it seems likely that the stock will continue to trade water in 2022.

Without a significant catalyst to push the shares higher, such as a substantial recovery in revenues and holiday bookings, I think the market will continue to wait for positive news.

If there is one thing the market hates more than anything else, it is uncertainty. And right now, there is a lot of uncertainty surrounding the TUI share price. No one can be sure what is just around the corner for the company. 

Therefore, I will not be buying the stock for my portfolio anytime soon. Until the group reports a material improvement in trading, I think it will remain a risky investment. I believe there are plenty of other companies on the market that offer better prospects considering the outlook for the travel industry and economy in general. 

Rupert Hargreaves has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.

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It’s been a gloomy time recently to own Renalytix (LSE: RENX). While the share price has increased 20% over the past year, at the time of writing this article yesterday, it’s lost over half its value since May.

Could this be a buying opportunity for the kidney diagnostics specialist? Below I consider what has been driving the share price action and whether I should add Renalytix back into my portfolio.

The growth challenge

Early investor sentiment (including mine) on Renalytix was positive. Its proprietary diagnostic platform offered an attractive business model. Development costs could be substantial. But the platform’s scalability meant that if enough healthcare users signed up, the profits could be substantial.

I think that continues to be the case. But the Renalytix share price is now showing some impact from the challenge of meeting high growth expectations. To launch a service from a standing start requires substantial investment in things like sales capability. In a regulated industry such as healthcare, it can take a while for potential customers to start buying new services. That means revenue growth can be slow at first, while costs stack up.

Growing costs

That’s exactly the picture right now at Renalytix, as shown in the company’s latest set of quarterly results that it released this week. The company has expanded its sales force, begun clinical testing with a couple of new healthcare providers and increased the ordering base in its launch site.

Revenues remain very modest, but at $0.5m they do compare favourably to the zero revenues reported in the equivalent quarter last year. However, quarterly operating expenses also ballooned, from $5.4m to $12.1m. That led to a larger loss for the quarter than in the comparable period, of $10.1m.

Is Renalytix moving in the right direction?

What does all this mean for the company’s outlook? It’s hard to tell just yet. A growing sales force should lead to higher revenues over time. There are signs that things are moving in the right direction on that score, with increased testing and service rollout, albeit still on a limited scale.

But that’s coming in at a growing cost. Net cash outflow due to operating activities in the quarter was $10.5m. With cash and cash equivalents on hand of $54.3m at the end of September, the company has enough cash for around five quarters of such net cash outflow. But a growing cost base as headcount grows could lead to cash outflow quickening. One solution to that would be to raise more funds, for example by issuing shares. That risks diluting existing shareholders.

On balance, I think the company is making the right moves, but it’s too early to tell if they will produce the desired financial results. That explains the fall in the Renalytix share price, I feel. And I think it could fall further in coming quarters if revenues don’t grow substantially.

My next move

I continue to like the Renalytix story. It has a large addressable market and attractive proprietary technology with growing clinical proof to help attract healthcare customers.

But revenues are yet to take off in a big way, while costs are mounting. In the absence of further positive sales news, I won’t be buying Renalytix again for my portfolio right now.

Christopher Ruane has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.

Sometimes I can wait ages for a bus and then suddenly there’s a flurry of action. It’s been a somewhat similar story for shareholders in Stagecoach (LSE: SGC) lately, with the shares moving up and down markedly this month. Over the past year, the Stagecoach share price has fallen 3%, at the time of writing this article yesterday.

Below I look at what’s driving the price movement – and what might come next.

Decent interim results

Yesterday, Stagecoach issued its interim results covering the six months to the end of October. These contained some good news. Revenue of £579m beat the equivalent period last year, which was heavily affected by pandemic restrictions. Pre-tax profit came in at £31m and earnings per share were 1.9p. The company is cash flow positive. It also reduced net debt from £313m to £268m.

All of that suggests to me that the business is moving in a positive direction. It also suggests that the worst of the pandemic impact may now be in Stagecoach’s rear view mirror.

However, there are still some grounds for concern that I think may be troubling investors. For example, for most of November, passenger journeys were at over 70% of the equivalent 2019 levels. But that figure has since softened, due to factors such as pandemic variant concerns. This shows that sudden demand shocks remain an ongoing risk to the company’s revenues and profits. But more worryingly, the passenger recovery of “over 70%” seems fairly weak to me. It means that around a quarter of all passenger journeys that were being taken before the pandemic have not rematerialised to date. Compare that to recovery in retail and hospitality, for example, where some operators have recovered or surpassed their 2019 levels of customer demand. It may be that there have been structural shifts in working patterns and willingness to travel on buses. That threatens both revenues and profits at Stagecoach.

Merger speculation

Another driver for movements in the share price in recent months has been speculation around a possible combination with rival National Express. The interim results were vague on this, saying that “constructive discussions are continuing with National Express Group plc on a potential combination of both groups that would deliver strong value creation for both sets of shareholders”.

That doesn’t reveal much, although it does suggest that getting a good deal for Stagecoach shareholders, not just National Express investors, could be a sticking point in the discussions. As time goes on, I detect a limited hunger to do a deal here. If that turns out to be the case and no merger materialises, it could drive the Stagecoach share price lower. But I reckon the investment case for the company doesn’t require a merger. So longer term I’m not worried if it doesn’t happen.

My next move on Stagecoach

The possibility of a takeover premium has boosted the Stagecoach share price. Yet I feel that improving demand and profitability should help to boost the company over the long term, with or without a merger. While I have concerns about the limits of demand recovery, I thought the interim results showed a company in recovery mode. If that continues for the full year, it could help support a higher share price. I will continue to hold my shares.

Christopher Ruane owns shares in Stagecoach. The Motley Fool UK has no position in any of the shares mentioned. 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.