Where Will Carnival Stock Be in 3 Years?

The past few years have been tough on Carnival Corp. (CCL -0.66%). The cruise line operator's revenue plunged in 2020 and 2021 as global travel ground to a halt during the pandemic, and it was forced to take on a lot more debt to stay solvent. Its business recovered in 2022 and 2023 as the pandemic diminished and people started traveling again, but its stock has still lost about a quarter of its value over the past three years.

Could Carnival's stock keep climbing and hit new highs over the next three years? Let's review its previous slowdown, its recent recovery, and its expectations for the future to decide.

Image source: Carnival Corp.

Looking back at Carnival's slowdown and recovery

In fiscal 2020 and fiscal 2021 (which ended in November 2021), Carnival's revenue and number of passengers plummeted. Its occupancy rate stayed above 100% in fiscal 2020 as it filled the vessels that hadn't been suspended yet, but it barely filled up half of its active vessels in fiscal 2021 as more travelers stayed home. But over the past two years, all three of those core growth metrics bounced back.

Data source: Carnival.

Carnival also turned unprofitable in fiscal 2020 with a net loss of $2.2 billion, which widened to $9.5 billion in fiscal 2021. But as its business recovered, it narrowed its net loss to $6.1 billion in fiscal 2022 and just $26 million in the first nine months of fiscal 2023. On an adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) basis, it generated a profit of $3.3 billion in the first nine months of fiscal 2023, compared to a loss of $1.6 billion a year earlier.

Should investors expect smooth sailing over the next three years?

For the full year, analysts expect Carnival's revenue to rise 77% to $21.5 billion -- which would finally surpass its pre-pandemic revenue of $20.8 billion in fiscal 2019 -- with a positive adjusted EBITDA of $4.1 billion and a narrower net loss of $193 million. For fiscal 2024, they expect its revenue to rise 13% to $24.3 billion, its adjusted EBITDA to grow 31% to $5.4 billion, and for it to return to full-year profitability with $1.2 billion in net income.

During Carnival's latest conference call, CEO Josh Weinstein said it was already off to a "great start" for 2024 with its "European brands booking curve now essentially back to 2019 levels and our North American brands exceeding historical highs." Weinstein also noted Carnival was seeing "no signs of demand slowing" yet, but its booking volumes would eventually recede as it simply runs "out of inventory to sell."

For fiscal 2025, analysts expect Carnival's revenue to grow 5% to $25.4 billion, its adjusted EBITDA to rise 10% to $6 billion, and for its net income to increase 54% to $1.8 billion. Investors should take those estimates with a grain of salt, but they strongly suggest Carnival's business will stabilize over the next two to three years.

But it's shouldering a lot more debt than before

Carnival's revenue and profits are climbing again, but investors should recall that its debt levels more than tripled throughout the pandemic. It ended fiscal 2019 with $9.7 billion in long-term debt, but that figure hit a whopping $29.5 billion in the third quarter of fiscal 2023 -- which was more than 10 times higher than its $2.8 billion in cash and equivalents.

That leverage gives Carnival a high debt-to-equity ratio of 4.6. Yet its competitor Royal Caribbean (RCL 2.27%), which endured a similar slowdown during the pandemic, ended its latest quarter with an even higher debt-to-equity ratio of 6.1.

Carnival insists its debt load is manageable. During its latest conference call, CFO David Bernstein said its "maturity towers have been well managed through 2025 with just $2 billion of debt maturities next year and only $2.2 billion in 2025."

Nevertheless, investors should still take into account Carnival's debt -- which is reflected in its higher enterprise value instead of its lower market capitalization -- when valuing its stock. With an enterprise value of $48 billion, Carnival doesn't seem expensive at 2 times next year's sales and 9 times its adjusted EBITDA. Royal Caribbean is similarly valued at 3 times next year's sales and 9 times its adjusted EBITDA.

Where will Carnival's stock be in three years?

Carnival's stock has rallied nearly 90% this year as its business stabilized after the height of the pandemic, but it remains nearly 80% below its all-time high from early 2018. Therefore, I believe its stock remains undervalued relative to its growth prospects and should gradually head higher over the next three years -- as long as its recovery isn't unexpectedly derailed by another global pandemic, broadening geopolitical conflicts, or a major recession.