What happened

Shares of Norwegian Cruise Lines (NCLH -1.60%) plunged 24.9% in the month of August, according to data from S&P Global Market Intelligence. The cruise line stock reported second-quarter earnings on August 1, and investors responded by selling off the stock in a big way.

At first glance, it appears Norwegian's results were actually quite good. However, with the stock having had a massive run from April through July, a somewhat conservative outlook for Q3 earnings per share (EPS) sent investors into profit-taking mode.

So what

In Q2, Norwegian saw revenue increase 85.7% to $2.21 billion, with adjusted (non-GAAP) EPS of $0.30 compared with an adjusted net loss per share of $1.14 in the prior-year quarter. Both figures beat expectations.

At first glance, it's hard to understand why the stock sold off. Norwegian's bookings were very strong, and the company has been able to raise prices to consumers without sacrificing occupancy, while keeping costs in check. Importantly, this was also the first time that Norwegian's quarterly adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization) was above the comparable quarter from 2019. That's an important milestone on the way to recovery.

Still, it appears with the run-up into the report, investors were expecting even more from Q3 guidance, which is the peak cruising season. For the upcoming quarter, management forecast around $0.70 in adjusted EPS compared with analyst expectations of $0.79. Full-year expectations are still in line with analysts' estimates, but given the outperformance in Q2, the full-year outlook may have disappointed some as well. This isn't so much about demand; rather, it's that Norwegian's cost-efficiency initiatives have largely played out, with more modest reductions in costs-per-available capacity day in Q3 and beyond.

Now what

All in all, it wasn't really a bad report for Norwegian. However, there is a wide range of outcomes for the stock, as Norwegian and its peers now must dig themselves out of the massive debt holes they dug during the pandemic.

Norwegian still has about $13 billion in short- and long-term debt against $900 million in cash -- about double the net-debt load it had prior to the pandemic. Therefore, while adjusted EBITDA just surpassed a comparable 2019 quarter for the first time, it will take multiple years of profitable operations to make a dent in the company's debt pile.

The upshot: Investors should expect anything other than a seamless quarter or guidance to result in volatility. Concerns around interest rates and the economy will also affect cruise line stocks, as cruises are very popular but still discretionary purchases.