Rheinmetall share price forms alarming pattern: will it crash to €1,020?

The Rheinmetall share price has lost momentum in the past few months and has formed a risky pattern, pointing to an eventual pullback in the near term. RHM stock was trading at €1,543, down by 23% from its highest point this year. 

Rheinmetall share price has formed an alarming pattern

The weekly timeframe chart shows that the RHM stock price has been in a strong bull run in the past few years. This surge pushed its market capitalization from below €3 billion in 2021 to a record high of over €90 billion. Its valuation has now pulled back to the current €73 billion. 

A closer look at this chart shows that the stock has formed a double-top pattern at €1,940 and a neckline at €1,481. A double-top pattern is one of the most bearish signs in technical analysis. 

This pattern has a height of €460, which is calculated by subtracting the double-top section from the neckline. In this case, subtracting this height from the neckline gives it a target of €1,022, which is about 30% below the current level. This price coincides with the 50% Fibonacci Retracement level.

On the other hand, a move above the key resistance level at €1,700 will invalidate the bearish outlook.

Rheinmetall’s business is doing well

The bearish Rheinmetall share price forecast is based on its technicals, with its fundamentals doing well.

For example, the company received a major order for its Remote Controlled Howitzer valued at over €1.2 billion. In this order, the company will supply the electrical systems, software, and the 155 mm weapon systems starting from 2027. 

This order came a few days after the German government place an order for the Puma fleet in a deal worth €4.2 billion. It will receive €2.1 billion, while KNDS, its partner in this project, receives the rest.

It also received a €1.7 billion order from the German Armed Forces for its space-based reconnaissance data in a deal valued at over €1.7 billion. 

This order growth will likely continue in the coming years as Europe boosts its defense spending. This spending is part of the bloc’s approach to ReBuild, ReArm, and ReEquip. As a result, the management has expanded its business portfolio in areas like vehicle systems, air defence, digital, and naval. 

Additionally, the company is benefiting from the ongoing ramp-up in defense spending, with NATO aiming for 5% of GDP. Germany aims to get to 3.5%

All these events will lead to more demand and revenue growth over time. Indeed, the management recently predicted that its revenue will jump fivefold to 50 billion euros by 2030.

The most recent results showed that its revenue rose by 20% to €7.5 billion as its backlog surged to €64 billion. The management expects that its revenue growth for the year will be between 25% and 30%.

Still, there are concerns that the company’s business has become highly overvalued. Its price-to-earnings (PE) ratio rose to 82, much higher than the median estimate of 25. Also, its forward EV to EBIT multiple of 36 was higher than the sector median of 17.5.

This valuation, together with the double-top pattern, points to more downside in the near term. 

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