Carnival Corp. (CCL 0.33%) is no longer a meme stock. It's up 65% over the past year, and its business is back to booming. Now that it's rebounded, should investors move on the next big thing? Not so fast. Carnival has a powerful leadership position as the largest cruise operator in the world, and it might deserve a spot in your portfolio. Let's see where it could be five years from now and whether or not you should buy it.
Demand for cruises is still hot
Carnival demonstrated an incredible recovery last year, as expected. Now it's keeping up its solid performance as it fields high demand, with record revenue and improving profitability.
The 2024 fiscal first-quarter (ended Feb. 29) results surpassed expectations across several metrics. Revenue was a record $5.4 billion, 23% higher than last year. It had record first-quarter deposits of $7 billion, and generally accepted accounting principles (GAAP) net loss improved from $693 million last year to $214 million this year.
Management had previously said that it was coming into 2024 in its best booked position ever, and it's already in a better position for 2025 than it was for 2024 at this time last year. It has limited inventory for the rest of the year, pushing out bookings from strong demand into a longer curve at higher ticket prices, setting itself up for a strong start to 2025.
Carnival is still experiencing high demand as a pushback from lockdown, and that's not going to last forever. The current increased demand illustrates consumer confidence in Carnival as well as high overall interest in its product, indicating an enduring business model that can withstand short-term challenges and bounce back. Five years from now, demand is likely to be completely normalized, but still strong. In other words, it should be similar to its pre-pandemic performance.
Problems persist, but there's a path toward profits
The main risk with buying Carnival stock is that it took on a heavy debt burden to keep its doors open when ships weren't running. It's been paying off that debt, but it will take several years to fully get rid of it. Until it does, it's vulnerable to anything new that could rock its boat, so to speak.
For example, Carnival has already been impacted by the bridge collapse in Baltimore last week, and it had to reroute a returning cruise ship to Norfolk, Virginia. It anticipated a $10 million headwind to profits for the 2024 full year based on the incident.
Carnival paid off another $1 billion in high-interest debt in the 2024 first quarter, which it takes from cash from operations and free cash flow. It generated $1.8 billion in cash from operations, up from roughly $400 million last year, and roughly $1.4 billion in adjusted free cash flow, up from $144 million, in the quarter.
It still needs to balance debt payoffs with keeping enough money to maintain and grow its business. It took delivery on two new ships using a new credit facility even as it paid down other debt, and it ordered its first new ships in five years for delivery in 2027 and 2028. It expects these investments to yield higher revenue down the line.
In five years, it might still have some of this debt outstanding, but it should be in a much better financial position, with more leeway for hiccups along the road.
Carnival can be a market-beating stock
Carnival stock gained 130% last year, soundly beating the S&P 500, but it's down 12% year to date, trailing the market.
Historically, Carnival has been a market-beating stock. It's still stabilizing after years of volatility and carrying a high debt load. In five years, it should be stable, with a steady and growing business, and it's likely to be back to its market-bearing performance. As such, it could be an excellent value candidate for a diversified portfolio.
