Royal Caribbean and Carnival stocks face this 1 key risk

Cruise stocks are thriving, helped by strong demand and soaring revenue in key countries. Royal Caribbean (NYSE: RCL) stock price has jumped by over 90% while Carnival (LON: CCL) has surged by over 40% in the past 12 months. Other cruise companies like Viking and Norwegian Cruise Line have also risen in that period.

Strong demand in the cruise industry

Royal Caribbean and Carnival stocks have done well in the past 12 months. This year, however, Carnival has erased some of the gains made in 2023 and is now down by over 12%, underperforming the S&P 500 and Nasdaq 100 indices.

Most of these companies have reported strong bookings and revenue growth. Carnival’s total revenue soared from over $12.1 billion in 2022 to over $21.59 billion in 2023. It also narrowed its net loss from over $6 billion to about $74 million in 2023. Also, it narrowed its long-term debt from over $31 billion to about $28 billion.

Royal Caribbean Cruises has also reported strong financial results. Its annual results jumped from over $8.84 billion in 2022 to over $13.9 billion in 2023. Unlike Carnival, the company turned its net profit to over $1.7 billion.

The most recent results showed that its quarterly revenue rose from $2.88 billion in Q1’23 to over $3.7 billion in Q1’24. Its profit also soared to over $364 million during the quarter.

Carnival vs Royal Caribbean stocks

One key risk to remember

Royal Caribbean and Carnival have done well because of the rising demand, especially among young people in the US. Recent data shows that there were over 31 million cruise customers in 2023, a big increase from 20.4 million a year earlier. 

According to the Cruise Lines International Association, the number will jump to over 34.7 million in 2024 followed by 37.1 million, 38.8 million, and 39.7 million in the next three years, respectively. 

Most of these companies have reported strong forward bookings. Viking is 35% fully booked for 2025 while some of Carnival’s and Royal Caribbean ships have been fully booked for the year. This trend happened as some customers believe that cruises are cheaper than land holidays.

As a result, these companies have made several orders to take advantage of the growing demand. Viking has ordered 10 ships while Norwegian and Carnival have ordered eight and 1 ship, respectively. Royal Caribbean has recently received the delivery of the biggest cruise ship in the world; Icon of the Seas.

The risk is that the cruising demand will likely not last for a long time and that it will have slowed down when the deliveries happen. In a recent note, an analyst at Truist said:

“There’s the concern among people [if we are] in a demand bubble . . . and [if] there is a revenge travel bubble in cruise lines, like we saw with US resorts. I do think we are in a period of accelerated demand and it’s going to be hard to maintain these massive growth rates that we’ve been seeing.”

Fortunately, Carnival and Royal Caribbean are relatively undervalued. Royal Caribbean has a forward PE multiple of 13.75 while Carnival has a multiple of 16.4. These metrics are lower than the forward PE multiple of 2. They also have forward growth multiples of over 20%, higher than the S&P 500 forward growth rate.

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