It's hard to time the stock market. But the 2022 downturn may have priced in a lot of bad news, giving investors a chance to buy their favorite stocks at a discount.

With its share price down by 52% over the last 12 months, Carnival (CCL 5.48%) certainly looks like a potential buy-the-dip opportunity. But investors should think carefully before putting money behind this embattled cruise ship operator. 

Cruise ship sailing in open waters.

Image source: Getty Images.

Bouncing back to previous levels?

The COVID-19 pandemic was perhaps the cruise industry's most catastrophic black swan event in history, and it is finally coming to a close.

In 2022, Carnival and its peers scrapped testing and vaccination requirements on voyages under two weeks. And industry insiders expect the Chinese market to ease restrictions by 2024. Carnival's management previously saw the Asian nation as a big growth opportunity, representing around 5% of passenger capacity in 2019.

The cruise industry recovery is starting to show in Carnival's operating performance. With fourth-quarter revenue of $3.8 billion, the company has regained 80% of its pre-crisis sales. And deposits for future voyages hit a record high of $5.1 billion.

But that's where the good news ends. 

Weak financials 

While Carnival's top-line metrics are improving, its balance sheet is worsening because of catastrophic cash burn. In full year 2022, it generated an operating loss of $4.4 billion -- after losing $7.1 billion in 2021 and $2.2 billion in 2020. Even if the company returns to operating profitability this year, it could take decades to undo the damage. 

As of the end of 2022, Carnival's balance sheet held $32 billion in long-term debt. And this leverage will put further strain on its cash flow situation through debt paydown and interest expense -- which totaled $1.6 billion in 2022.

This means that even if the company can regain its 2019 operating income ($3.3 billion), interest payments alone will take up almost half of that. Further, since 2019, Carnival's share count has ballooned by more than 80% to 1.3 billion, so shareholders' claim on future earnings will be significantly more diluted than before. 

As a cruise ship operator, Carnival also runs a capital-intensive business. Not only does it have to maintain its fleet, but it also has to buy new vessels to replace aging ones and grow capacity. Capital expenditures totaled $4.9 billion in 2022, another whopping outflow. 

The stock is not cheap

With a price-to-sales (P/S) multiple of 1.05, Carnival's stock looks quite affordable on the surface. After all, that valuation is less than half the S&P 500's average of 2.27. But the picture looks much less rosy when you consider the company's debt load, which is around twice the size of its market cap. 

This leverage should be a big consideration in Carnival's valuation because it will be a major long-term drag on the company's cash flow and profitability. While bondholders will probably get their interest payments, it's hard to see the company generating significant value for common stockholders.