In the five years leading up to its all-time high in January 2018, Carnival (CCL 4.92%) was a winning investment. Its shares jumped 86% during that time.
It's been a different story since then, though. This cruise stock currently sits 80% below its peak price. That's even after shares soared 76% since the start of 2023 (as of April 18).
Does this setup on the dip make Carnival a once-in-a-generation investment opportunity? Here's what investors need to know.
Smooth sailing
Carnival's business is giving its shareholders plenty of reasons to be optimistic. In fiscal 2023, which ended Nov. 30, the company reported revenue of $21.6 billion, a record figure that was up 77% year over year. This number exceeded the previous record, which came in fiscal 2019.
The momentum carried over into the first quarter of 2024. During that 12-week stretch, the company hit a first-quarter record for sales. Key to this strong momentum is, without a surprise, robust demand from consumers.
"This has been a fantastic start to the year. We delivered another strong quarter that outperformed guidance on every measure, while concluding a monumental wave season that achieved all-time high booking volumes at considerably higher prices," CEO Josh Weinstein highlighted in the latest earnings press release.
Warren Buffett, who many consider the greatest investor ever, once said that he believes the mark of a wonderful business is one that can raise prices with minimal pushback from customers. Carnival is currently demonstrating this characteristic.
It will be interesting to see if the recent trends are simply a one-hit wonder or a more sustainable development. The bulls are definitely hoping it's the latter.
But this is a business that is recovering nicely from the worst days of the pandemic. At one point, Carnival was forced to halt its operations temporarily to prevent the spread of COVID-19. Revenue took a huge hit, dropping 91% between fiscal 2019 and fiscal 2021.
Now that the company has bounced back and looks to be on solid footing, I'm sure it's starting to catch the attention of investors. Shares still trade at a reasonable forward P/E of 14.
NYSE: CCL
Key Data Points
Rough waters
It's easy to say this with the benefit of hindsight, but I don't necessarily think it's shocking to see Carnival putting up such strong numbers right now. Unless you were convinced that demand for cruise travel would permanently fall off a cliff, I bet you expected that this business would experience a reversion to the mean.
For what it's worth, Wall Street believes the good times won't last very long. Analysts see annual revenue gains shrinking going forward, with fiscal 2026 sales rising by just 1.9% compared to the prior year.
It's easy for investors to become short-sighted and focus too much on financial results from one year or one quarter. But it's best to think about the bigger picture, turning our attention to the long term.
To be clear, I still believe Carnival is an extremely risky business to own. As of Feb. 29, the company had a massive debt load of $31 billion. A lot of this capital was raised to buy the company time throughout the pandemic. Management has used cash to pay down the principal. But that's a huge burden that adds tremendous financial risk should there be economic weakness.
Speaking of the economy, demand for cruise trips demonstrates cyclicality, as it's a discretionary purchase. I'm concerned about how Carnival will fare in a potential recessionary scenario, which could happen unpredictably.
It might be smooth sailing for Carnival right now, but there are always rough waters to worry about. I don't believe this is a once-in-a-generation investment opportunity.
