The pandemic devastated the travel industry in 2020 as many tourism-related businesses sharply curtailed their activity or shut down altogether. While many travel stocks have recovered as the U.S. economy has reopened, others such as Airbnb (ABNB 1.20%) and Carnival Cruise Lines (CCL 5.94%) continue to lag. Given this situation, investors should take a closer look at these stocks to see whether their current valuations offer buying opportunities or imply further troubles to come.
Airbnb IPOed late last year, and after surging higher during its first two months on the market, it has pulled back. Now, it trades for around $137, below the level on Dec. 10 -- its first day of trading.
To be sure, Airbnb changed the travel industry by bringing individual property holders into the hospitality market. This has forced established hotel booking companies such as Booking Holdings and Expedia to attempt to compete by offering comparable short-term rentals.
Nonetheless, while HomeToGo's subsidiary Tripping.com also operates in this space, Airbnb remains the only publicly traded company focused exclusively on marketing individual rental properties and rooms.
Still, while the U.S. appears on course to emerge from the intense phase of the pandemic, Airbnb remains in a recovery mode. It reported first-quarter revenue of $887 million, a 5% increase from year-ago levels. However, its losses of almost $1.2 billion came in 244% higher as lower costs of revenue and operating expenses did not compensate for negative interest income and high debt issuance costs.
Nonetheless, that represents an improvement from 2020, when its full-year revenue dropped 30% from 2019 levels to $3.4 billion. Also, because the company faced higher operating costs and IPO expenses in 2020, losses during that period spiked nearly sevenfold to nearly $4.6 billion. Although Airbnb declined to release specific numbers on its outlook for Q2, management said that it expects its revenue to be similar to the second quarter of 2019.
Despite this likely recovery, the stock appears pricey. The price-to-sales (P/S) ratio stands at about 21. While that valuation is lower than it has been this year, it remains well above Expedia's P/S ratio of 5.3 or Booking Holdings' sales multiple of around 16. Although Airbnb should move higher in the long term, expenses and a slow recovery could hinder its near-term growth.
COVID-19 affected Carnival even more profoundly than it did Airbnb: The pandemic completely shut down the cruise line operator and its peers for over a year. Now, cruise ships have finally been given the go-ahead to resume sailing from the U.S., and Carnival's first cruise in more than 15 months left port on July 3. This means that its fiscal second quarter, which ended May 31, will likely be the last one of negligible revenues.
Carnival also remains the largest operator of cruise lines, which has helped it weather this storm better than smaller, less capitalized operations. Moreover, the fact that one of its scheduled 2022 cruises sold out in six hours points to tremendous pent-up demand.
We will not know how its return to the sea will affect its financials until Carnival announces fiscal Q3 earnings in the fall. Still, now that it can earn significant revenues, the numbers will almost certainly improve.
For the first two quarters of fiscal 2021, Carnival reported only $75 million in revenue, down from $5.5 billion in the first half of 2020. However, its $3.1 billion in losses for the first half of 2021 was less steep than the $4.8 billion loss it suffered for the first six months of 2020. Although Carnival reduced operating expenses by 80% during that time, its 2021 losses would have increased had the company not booked $2.1 billion in goodwill impairments in the first half of 2020.
Those lost revenues still weigh on Carnival's stock. It's trading at less than half its January 2020 levels. And while it has risen far above its early 2020 lows, Carnival shares fell again last month amid rising worries over the spread of the Delta variant of COVID-19.
All of that lost revenue also will bring profound, longer-term effects in the form of debt obligations. The total debt of almost $31 billion Carnival is carrying now is close to triple the $11.5 billion in total debt on its books at the end of 2019. Consequently, Carnival has paid $835 million in interest during the first six months of 2021. In comparison, it spent only $206 million on interest expenses in all of 2019, a year when it reported a net income of $3 billion. The company will probably face approximately $1.6 billion in annual interest expenses for the foreseeable future, indicating a long, slow recovery that could weigh on the stock for years to come.
Given current business and financial conditions, investors should assume that current stock prices do not reflect any undervaluations. Both businesses should recover. However, Airbnb could struggle to justify its current price-to-sales multiple, while Carnival's debt burdens will probably make it harder for the company to return to its pre-pandemic profit levels. Thus, today's lower stock prices probably do not reflect buying opportunities for either company.