With eight different cruise lines catering to a wide demographic, as well as more than 90 ships in operation, Carnival (CCL 0.42%) is the largest cruise line operator on the planet.
The business was decimated by the pandemic. It was forced to halt operations, leading to sizable net losses and rising debt. However, the company has bounced back, thanks to strong demand.
Shares have jumped 87% in the past two years, as of April 15. But due to ongoing economic concerns, driven by fears of trade wars and other geopolitical issues, this cruise line stock trades 37% below its 52-week high. Maybe this is a solid buy-the-dip candidate for your portfolio that has big upside.
If you invest $10,000 in Carnival right now, will you be a millionaire one day?
Durable demand for cruise travel
The pandemic was a boon for internet-enabled enterprises, but it was devastating for Carnival. Revenue declined 73% and 66%, respectively, in fiscal 2020 and 2021. When restrictions eased and consumers felt comfortable traveling again, the company experienced rapid growth. Sales were up 13-fold between fiscal 2021 and fiscal 2024.
The momentum hasn’t abated. During the 2025 first quarter (ended Feb 28), Carnival posted a revenue increase of 7.5%, a first-quarter record. Management cited robust demand, record net yields (a measure of pricing power), and strong on-board spending.
With ongoing expense discipline pushing its bottom line, Carnival reported impressive 97% year-over-year growth in operating income to $543 million, another first-quarter record.
It’s easy to be optimistic that the company will be sailing smoothly over the long term. There are favorable tailwinds that support durable demand for cruises.
They are generally cheaper than land-based options. The industry is attracting younger and first-time travelers. And looking at the worldwide travel industry, cruises account for a very tiny fraction.
Carnival’s biggest risks
To its credit, Carnival is aiming to tighten up its finances. Management refinanced $5.5 billion of debt, lowering interest payments in the process.
The debt burden can still be troubling, though, especially for more risk-averse investors who prefer the companies they own to have a balance sheet that isn’t overly leveraged. Carnival still has $27 billion of long-term debt, representing 116% of its entire market cap.
Macro uncertainty is another risk, particularly in the near term. If consumers expect tough times ahead, they will likely cut back on discretionary spending. To be clear, no one can accurately predict when or if a recession will even happen. But major investment banks are increasing their estimates of the likelihood that the U.S. will experience a downturn this year.
To alleviate concerns, it’s worth pointing out that consumers plan to spend more on cruises over the next three months relative to the prior quarter, according to a study by McKinsey. And during its latest quarterly update, Carnival raised its guidance for various financial metrics for fiscal 2025.
Don’t have high hopes
Carnival’s risks are something investors should always keep in mind. But even considering these downside factors, the stock still looks like a smart buy candidate today.
Shares trade at a compelling valuation. They can be purchased at a forward P/E ratio of 9.6. Given that Wall Street consensus analyst estimates call for adjusted earnings per share to increase at a compound annual rate of 20.7% between fiscal 2024 and fiscal 2027, the current valuation is a bargain.
Investors might want to consider adding the business to their portfolios. However, I think it’s wise not to expect it, or any other single stock for that matter, to make you a millionaire. Putting all your eggs in one basket could work out, but it’s likely to cause more harm, especially from a psychological perspective. Carnival should be held as part of a diversified portfolio.
Neil Patel and his clients have no position in any of the stocks mentioned. The Motley Fool recommends Carnival Corp. The Motley Fool has a disclosure policy.
