Carnival (CCL -0.66%) stock became a meme stock king early in the pandemic when it had no revenue, borrowed loads of cash to survive, and retail investors were betting on its lifespan.
Now that period has passed, and Carnival is demonstrating an incredible rebound. It gave investors news to cheer about this week, but its stock tanked after the report. What's going on here? And can you still buy?
Getting back to growth
When cruise lines were completely shut down for several months, the only way to save them from going under was to borrow massive sums to maintain minimal operation. Carnival went from a top global company, the largest cruise operator in the world, to a non-functioning entity with no revenue coming in.
Taking on debt made sense because if the world would go back to the way it was, Carnival could make money and pay back its heavy loans. It was a fairly simple calculation with strong repercussions, and that's what investors were betting on at that time.
That has come to pass, and over the past two quarters, Carnival has demonstrated a robust rebound and record metrics. The company released its fiscal second-quarter (ended May 31) earnings on Monday, and they exceeded expectations.
Revenue of $4.9 billion was a second-quarter record and is the first quarter to surpass pre-pandemic levels. Net loss was $407 million, and adjusted net loss of $395 million beat guidance of $425 million to $525 million. Adjusted EBITDA was $681 million, after a $900 million loss last year and $382 million in the 2023 first quarter, and at the higher end of guidance of $600 million to $700 million.
After record bookings in the 2023 first quarter, the second quarter produced a new record, with accelerated bookings and a record $7.2 billion in deposits, above the previous record of $6 billion in 2019.
The standout metric, though, was operating income, which was $120 million and became positive for the first time since the pandemic started. That's an impressive showing, and as the CEO said, a turning point in the recovery.
Management provided guidance of $2.05 billion to $2.15 billion in third-quarter adjusted EBITDA, significantly higher than the second quarter, and it raised full-year guidance to $4.10 billion to $4.25 billion.
Why did its stock price sink?
While the second quarter showed real improvement, and there's lots to be excited about, let's not forget that Carnival still posted a more than $400 million net loss. There's tons of momentum, and the strategy to get back to net profitability looks compelling, but it's not there yet.
In the meantime, Carnival has $34 billion in debt to pay off. The plan to do so, again, looks compelling. This is a highlight of its strategy right now and the company has shaved $1.4 billion off its peak debt. But a lot could happen from here to there, and the balance sheet is fragile. It can't handle another disaster. Although this isn't likely to happen, the financials still present a case of risk.
Another note of caution is that these outstanding results demonstrate a massive backlog of people waiting to get on a cruise. This kind of outsized demand might keep up for a while, but eventually it will decelerate to normal levels. There may be some up and down swings until it gets to that point.
Carnival could not have realistically reported better results, and the stock dropped anyway. After gaining for most of 2023, the stock price plateaued last week in anticipation of the second-quarter report. Investors seem to have realized that after gaining nearly 100% year to date and trading at a 52-week high, these positive developments have already been priced into the stock.
At its recent price, shares trade at 1.2 times trailing-12-month sales, which could be a bargain for a stock that should be a winner. There's something to be said for Carnival getting back to that, and it beat the market for many years prior to the pandemic.
However, Carnival is still posting losses and is saddled with high debt. Investing now means potentially waiting years for the company to be in healthy financial shape. There's definitely room for risk-tolerant investors to buy now, especially on the current drop. Most investors, though, should sit on the sidelines and wait for steadier improvement before buying shares.
