Carnival (CCL -2.30%) (CUK -2.23%) is the biggest cruise line operator, with more than 100 ships across nine different brands, and no other publicly traded cruise line has suffered as much from the pandemic. Having lost three-quarters of its value over the past year and more than 85% from just before the COVID-19 outbreak, Carnival's stock is trading at its lowest point ever.

Investors will see that and wonder whether this is an opportunity to swoop in and buy shares at a steep discount. The following areas are ones investors should consider first when looking at Carnival, so let's see whether this cruise ship stock will be sailing into the sunset or sinking into Davy Jones' locker.

Couples on deck of cruise ship.

Image source: Getty Images.

Passenger demand for cruises

Without passengers, every cruise line operator is a shipwreck waiting to happen. Surprisingly, this is one thing Carnival hasn't had to worry about too much. Even during the depths of the pandemic, there was substantial pent-up demand for cruises, and that continues today.

Carnival is finally almost back to full capacity, with 95% of its ships serving guests, and expects eight of its nine brands will be at full capacity by the end of the fourth quarter. Third-quarter bookings for future cruises continued to accelerate, which allowed it to "close the gap" on pre-pandemic levels. 

However, because of all the cruise cancellations over the past two years, first from COVID and then from the variant outbreaks, fourth-quarter bookings are running below historic levels and are being booked at lower prices because of the credits the company had to issue.

On the other hand, advance bookings for 2023 are slightly above the historic trend and are being filled at higher prices. This shows Carnival still commands pricing power due to consumer demand for cruises.

An anchor holding it down

Carnival seemed poised to begin sailing back toward profitability at the end of last year. It was preparing to have half its fleet consist of new, larger, more efficient ships that would save it money by cutting costs. Its third-quarter results, however, indicated Carnival would be seeing steep losses for much longer than expected.

The cruise line reported revenue of $4.31 billion, which was up substantially year over year (at $546 million a year ago), but this number still fell short of analyst expectations of $4.9 billion. Adjusted loss of $0.58 per share was a marked improvement over adjusted losses of $1.75 a year ago, but Wall Street was expecting losses of just $0.15 per share.

Although Carnival has almost $7.1 billion in cash and short-term investments, that's down by nearly $750 million from last year. At the same time, the amount of debt Carnival has on its balance sheet mushroomed by more than $2.8 billion to $35 billion. That's nearly quadruple the amount it had before the start of the pandemic.

With the Federal Reserve now aggressively raising interest rates -- it's increased the rate by 75 basis points an unprecedented three times and may very likely hike it by a similar percentage next month -- Carnival's borrowing costs could rise. The company's interest expense over the first nine months of 2022 was almost $1.2 billion. In 2019, it was just $157 million.

Rough seas ahead

Carnival looks like it has some rough sailing in front of it, and the expected safe harbor it was hoping for has been pushed further out. Rampant inflation and the possibility of a deep, protracted recession are potential rogue waves that could swamp consumer demand for cruises.

At just above $6 a share, Carnival's stock is cheap for a reason, but I wouldn't swear it off completely. The cruise operator has $7.4 billion of liquidity available, so it's not looking at a possible bankruptcy. Since the stock trades at fractions of the company's sales and book value, investors are getting a steep discount. While I wouldn't suggest going all in, investors who aren't risk-averse and don't need the money to pay bills or for emergencies might consider buying a small amount of Carnival stock at these levels.