Perhaps no industry was hit harder by the COVID-19 pandemic than the cruise industry, which saw companies like Carnival (CCL 0.87%) ground nearly all of its cruise operations for much of 2020 and 2021. While the worst of the crisis is over, the scars still show on its balance sheet and income statement. Let's dig deeper into why Carnival could face another existential threat before fully recovering from the first one. Here are three reasons Carnival stock owners might want to sell.

Reason 1: Returning to pre-COVID levels is difficult

In Carnival's most recent earnings report, management strikes a hopeful tone. According to CEO Josh Weinstein, the company plans to close the gap with 2019 and return to profitability. The remarks come as it relaxes vaccine and testing requirements for voyages lasting under two weeks. 

But while third-quarter revenue jumped almost 700% year over year to $4.3 billion, this number is still down significantly from the $6.5 billion Carnival generated in the corresponding period of 2019. Closing the gap will be easier said than done because, in 2020 and 2021, the company sold 19 ships to raise the capital needed to sustain its operations. And with an occupancy rate of 90% (as of August), it might have a limited runway for growth until it runs out of free capacity.

In the near term, management may turn to price hikes to drive inorganic revenue growth. But that strategy may prove unsustainable over the long term if Carnival doesn't spend the capital needed to regrow its fleet. The problem is that capital is extremely tight right now. 

Reason 2: Interest rate hikes make refinancing debt tougher

Unlike other hard-hit industries, such as air travel and hospitality, the cruise industry didn't receive a government bailout to help it weather the COVID-19 pandemic. Instead, companies like Carnival were forced to tap the credit markets and raise a huge amount of debt to survive the crisis. 

Red stock chart flashing sell

Image source: Getty Images.

As of the end of August, the company held a whopping $28.5 billion in long-term debt compared to just $7 billion in cash and equivalents on its balance sheet. This is a problem because, naturally, debt has to be paid back. But perhaps more importantly, it drains cash flow through interest expense, which totaled $422 million in the period. 

The Federal Reserve's rate hike policy could make this challenge worse by increasing interest rates on Carnival's existing debt while making it harder for the company to refinance its old loans. And with a third-quarter operating loss of $279 million and challenges like inflation and rising fuel costs likely to continue putting pressure on margins, the company's solvency situation doesn't look dire. 

Reason 3: Carnival's valuation is artificially low

After its massive declines in 2022, Carnival stock may look attractive to bargain-hunting investors. It trades for just 1.06 times trailing-12-month revenue compared to the S&P 500 average of 2.4. But there is a catch. 

When you buy a stock, you buy its debt in addition to its equity. And when you add Carnival's $28.5 billion in debt to its $11.5 billion market cap, you get an enterprise value of around $40 billion, which is quite high considering all the company's long-term challenges. The stock could face significant downside over the long term.