Carnival (CCL -0.66%) has become one of the more intriguing stocks of the 2020s. Saying it has sailed in rough waters is a gross understatement. The pandemic left the company without significant revenue for more than one year, leading to pain for the company and significant volatility for Carnival stock.
But though operations are finally normalizing, Carnival stock has not benefited, as shareholders see the reality of its challenges more clearly. The question for investors now is whether that lower stock price signals a buying opportunity or a sign to continue avoiding Carnival stock.
Carnival stock in the 2020s
As the cruise industry shut down during the pandemic, investors turned on Carnival stock, causing it to fall by nearly 80% in the first four months of 2020. Optimism about reopenings and a positive bull market helped bring investors back to the stock. The share price exceeded $30 per share in May 2021, right before operations resumed in July of that year.
However, investor optimism sank at that time and has yet to recover. Now, at around $12 per share, the cruise line stock sells at a discount of more than 60% from its pandemic peak and nearly 85% below its all-time high.
The state of Carnival today
But despite the stock's behavior, Carnival has largely returned to pre-pandemic activity levels. In 2023, the company predicts its capacity will surpass 2019 levels by 3%. Moreover, in November, bookings for that month exceeded those in November 2019.
This success gave Carnival some pricing power, and it announced a price increase on gratuities and Wi-Fi services in January. That should help Carnival outperform industry averages, as analysts expect cruise industry revenue will surpass 2019 levels by 2024.
Carnival's ongoing challenges
Unfortunately for shareholders, Carnival needs that additional revenue more than ever. In fiscal 2022 (which ended Nov. 30, 2022), the company lost almost $6.1 billion, with $1.6 billion of that loss coming in the fiscal fourth quarter. In comparison, the company lost $9.5 billion in fiscal 2021, when it did not sail for more than half of the fiscal year.
Carnival holds more than $4 billion in unrestricted cash as of the end of Q4. And since most analysts forecast a return to profitability by the second half of fiscal 2023, Carnival will likely survive.
However, thanks mainly to the pandemic, it holds approximately $34.5 billion in debt. That is a tremendous burden for a company valued at around $7 billion after liabilities are subtracted from assets.
Additionally, it faces $2.4 billion in yearly principal payments in both 2023 and 2024, and that liability will rise to more than $4 billion annually in 2025. Consequently, Carnival may have to refinance much of that debt at a significantly higher interest rate. For that reason, investors should assume that debt will remain a considerable burden for the company for years to come.
Should investors buy Carnival?
Carnival looks like it will not only survive the pandemic but benefit from increased interest in cruising. Still, that is not enough to make Carnival stock a buy in 2023 since the company will also have to apply most of its profits to servicing its debt. Because that will probably lead to lower profits and more share issuances in the future, debt will probably hamper the growth of Carnival stock for years to come. For that reason, investors should probably sail away from Carnival and seek less debt-burdened companies.
