Carnival (CCL 0.87%) stock has a few turnaround investors turning their heads lately. Shares of the world's largest cruise operator have plunged since the pandemic started as cruise operations were put on hold in the early stages of the health crisis -- and the company has been slow to recover since.
Now, a number of investors seem to see opportunity in the sell-off as Carnival has reported strong occupancy and booking trends, and the stock is down 82% since the start of 2020.
Despite that decline and the momentum in the business, Carnival stock isn't as cheap as it appears. If you're looking for a bargain stock in the travel sector, you're better off buying shares of Airbnb (ABNB 1.03%), the fast-growing, vacation rental leader. Here's why.
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Airbnb is a better value
Carnival might seem cheap given its recovery trajectory, but the company is operating at a wide loss and is deep in debt. In its fourth quarter, the cruise line posted a net loss based generally accepted accounting principles (GAAP) of $1.6 billion, or $1.1 billion after adjustments. On a free-cash-flow basis, Carnival lost $1.3 billion in the quarter.
The cruise line also holds $34.5 billion in debt, which is not just a drag on its balance sheet but is also costing the company $448 million in quarterly interest expense as of its most recent report. In other words, the stock looks cheap considering its pre-pandemic price and the narrative around the pandemic recovery, but the numbers say otherwise. Even if business returns to full health, that interest expense will be an anchor on profits.
Airbnb, on the other hand, is a growth stock that is disrupting the travel industry through vacation rental site. But after that stock fell 46% over the last year, it also looks like a value play.
In fact, Airbnb trades at an enterprise-value-to-free-cash-flow ratio (EV/FCF) of just 15. Unlike the price-to-earnings (P/E) ratio, EV/FCF factors in cash and debt, making it an arguably better reflection of the overall business. The home-sharing company had net cash of $5.5 billion in its most recent quarter, and its business model also benefits from a favorable cash collection cycle as it collects money from guests when they book but doesn't pay it out until they start their stays.
As an asset-light model built on an e-commerce marketplace, Airbnb also spends little on capital expenditures at just $16.6 million through the first three quarters of 2022, allowing it to generate free cash flow of nearly $3 billion through that time period. By contrast, Carnival spent almost $5 billion in capex in its most recent fiscal year.
The macroeconomic environment favors Airbnb
Not only is Airbnb cheaper than Carnival based on typical earnings ratios, but the home-rental pioneer is also better-suited to the current economic environment. Interest rates are rising quickly, which presents a challenge for companies with heavy debt like Carnival.
The cruise line has $8.4 billion in debt at floating rates, meaning interest payments on those loans will get more expensive as rates go up. It will also have to pay a higher interest rate on its fixed-rate debt that's maturing soon if it chooses to roll it over, which is likely given its recent financial challenges.
Airbnb, on the other hand, actually benefits from higher interest rates because it collects interest on the funds it holds in between bookings and stays. In its most recent quarter, the company reported $58.5 million in interest income, and that number is likely to go up as rates rise.
Additionally, Airbnb has an advantage over Carnival in a recession because its cost structure is much more variable than Carnival as its tech-infrastructure expenses tend to scale with demand. Prices on Airbnb also tend to adjust quickly to demand, and the company still makes money even on lower-priced stays as its model is based on commissions.
Carnival, meanwhile, has to pay to maintain its expensive cruise ships regardless of customer demand, and its fixed-cost structure means it loses money if booking rates fall below a certain level. That makes the company vulnerable to slowing demand in a potential recession.
While Carnival stock may eventually recover in a healthier economy, the company faces significant headwinds in its debt burden and the potential recession. Airbnb is growing rapidly, is well-priced based on free cash flow, and its business model is more resilient in a recession, especially as it benefits from higher interest rates.
If you're considering Carnival stock today, you're better off buying Airbnb instead.
