In the best interest of long-term shareholders, we are making disciplined decisions to optimize our performance in the short-term while leaving us best positioned to capture the full benefit of global travel and tourism growth over the long-term.

The above quotation comes from Carnival Corporation's (NYSE:CCL)(NYSE:CUK) 2019 annual report, published Feb. 26, 2020. It mentions the "short-term," but little did the company know what was just around the corner. On March 13, Carnival paused its cruises in North America due to the COVID-19 global pandemic. They've been on hold ever since as the company burns through hundreds of millions in cash every month.

Carnival stock has been decimated, and many investors are naturally wondering if they should buy before it goes back up. That question assumes it will go back up, and that's not a given.

CCL Chart

Carnival vs. S&P 500 Performance, data by YCharts.

A really good scenario

For Carnival stock to go back to where it was, the business would need to be what it once was. So let's quickly run down a best-case scenario, even if it's unrealistic. Carnival can't do business right now because the coronavirus docked its fleet. If a cure is soon found, the economy returns to normal, and folks "account it high time to get to sea" (as Herman Melville put it), then maybe business in 2021 would look something like 2019.

But Carnival, the company, won't immediately be what it was. It had $11.5 billion of debt at the end of February. Since then, it's raised $4 billion in secured notes and drawn $3 billion from its credit facility. This will need to be paid back down. The company generated $5.5 billion in cash from operations in fiscal 2019, and returned $2 billion to shareholders. Dividends and buybacks are already on hold. A fully operational Carnival could theoretically repair its balance sheet within five years by continuing this pause in shareholder returns.

Those two problems solved, one issue still remains: dilution. In April, Carnival raised $575 million by selling 71.9 million new shares. And it raised $1.95 billion through convertible notes, which could raise the share count by 195 million in 2023. For perspective, there were about 528 million shares of common stock outstanding before these moves.

By adding more shares, each share of Carnival represents a smaller slice of the company. All else equal, this means Carnival would need to grow its business beyond what it was in 2019 for the price per share to return to previous highs. 

This whole cheery scenario could take a decade.

A cruise ship off the Alaskan coastline.

Image source: Getty Images.

Bad (but real) possibilities

Rather than the scenario just described, it's more likely that Carnival's cruises will resume sailing with limited capacity. Carnival is already considering the limited capacity option, according to Business Insider. But it could also be mandated. Some legislators are already engaging airlines about keeping middle seats open to maintain physical distancing. Similar distancing restrictions could be imposed on cruise ships. 

Beyond these potential restrictions, cruise ship occupancy could remain low due to depressed consumer demand. Fears and weak economic conditions could lower bookings. Whatever the reason, a Carnival cruise with limited capacity won't generate the same cash flow as a full ship. This would delay the back-to-normal target date further.

There are also some harder-to-quantify bad possibilities, including future refund requests. Consider that from cancelled cruises, only 38% of customers have requested refunds so far, with most others choosing credits toward a future cruise. If Carnival were to postpone cruises further, say because of a new coronavirus outbreak, it could spark a wave of refund requests -- a potentially crippling drain on liquidity.

A young businessman surrounded by question marks on the blackboard behind him.

Image source: Getty Images.

Should you buy?

I know Carnival stock is on many new investors' radars. In an interview on CNBC's Mad Money, the CEO of investing app Robinhood identified Carnival as one of the top 10 most-bought stocks on the platform in March. I suspect folks are flocking to Carnival stock simply because it's down big. That's not a great reason to buy a stock. It's more like gambling.

Investing is often compared to gambling, but broadly speaking, I couldn't disagree more with the comparison. The odds are astronomically stacked against the gambler. By contrast, rarely should a person fear losing it all when investing in stocks, especially when buying into top companies.

However, in Carnival's case, if it can't return to cruising in 2020, the risk of bankruptcy increases considerably. Therefore, you must at least acknowledge that the lose-it-all outcome is on the table. I personally held shares through the crash, but I don't recommend putting new capital to work in this stock. At most, I'd allocate a small position in a balanced portfolio, acknowledging that it is a gamble. There are far better options for new investors to build their portfolios around.