Royal Caribbean Stock Is Up 21% This Year. Can the Rally Keep Going?

It's been smooth sailing for Royal Caribbean Cruises (NYSE: RCL) in 2024 with shares up 21% this year. The cruise line giant has managed to translate strong demand into sharply higher earnings. Indeed, the stock has surpassed its previous all-time high set back in 2020, finally leaving the era of pandemic disruptions in its wake.

While investors have plenty to cheer over, what's more important is what happens next. Is Royal Caribbean's positive outlook enough to keep the rally going? Here's what you need to know.

A record start to 2024

It's been a record start to 2024 for Royal Caribbean. For the first quarter, management noted record bookings for key itineraries driving 29% year-over-year revenue growth.

The increase in non-GAAP earnings per share (EPS) to $1.77 was even stronger, reversing a loss of $0.23 in the prior-year quarter. Free cash flow has also ramped up. The Q1 metric that stands out is a net yield (or profit) of $247.20 per passenger, up 19.5% from Q1 2023 and above the $196.89 result in Q1 2019 as a pre-pandemic benchmark.

In this case, the net yield represents the adjusted-gross margin Royal Caribbean generated per-passenger cruise day during the period. The company has been able to charge higher prices for tickets and earn more through onboard spending, with cruisers more than happy to pay up.

Image source: Getty Images.

An expanding addressable market

Several factors have contributed to this record environment at the start of 2024. The Royal Caribbean is attracting a more diverse and younger customer base seeking their ultimate vacation. Notably, higher levels of first-time cruisers and repeat guests including at Celebrity Cruises and Silversea indicate a broad brand momentum.

Excitement about new ships, such as Icon of the Seas and the upcoming Utopia of the Seas, has been part of the story, but the big picture also considers success in marketing and the compelling guest experience. That was the message from Royal Caribbean Group CEO Jason Liberty during the last earnings -conference call projecting confidence in the outlook:

Our addressable market is expanding, and New to Cruise continues to grow, increasing 16% year-over-year. These guests are discovering our differentiated vacation experiences and are increasingly returning to us as we see repeat rates over 30% higher compared to 2019. Our brands also continue to attract new and younger customers.

Royal Caribbean is now guiding for a full-year net yield between 9% and 10%, up from a prior target between 5.25% to 7.25% announced earlier in the year. Similarly, the company forecasts 2024 adjusted EPS of between $10.70 and $10.90, revised higher compared to the prior $9.60 midpoint estimate and $6.77 result in 2023.

Valuation remains attractive

These high-level themes are great news for investors with a sense that the profitable growth trajectory is just getting started.

Maybe the most exciting development for the company is the development of its two new Royal Beach Club destinations in Cozumel, Mexico, and Paradise Island, Bahamas, in 2025 and 2026. These resort-style experiences can support demand for new bookings over the next several years and also generate a higher net yield by keeping passengers within the company ecosystem.

Ultimately, Royal Caribbean's industry leadership with more of these popular private destinations is a differentiator compared to competitors like Carnival and Norwegian Cruise Line . Royal has been able to generate stronger revenue growth this year with an advantage in profitability over these cruise line peers that can be extended going forward.

RCL Gross Profit Margin (Quarterly) data by YCharts.

I believe shares of Royal Caribbean trading at just over 14 times the midpoint of management's 2024 EPS guidance is an attractive valuation, particularly next to Carnival at a forward price-to-earnings (P/E) ratio of 15.1. There is a case to be made that Royal deserves an even wider premium compared to Norwegian Cruise Line at a forward P/E of 12.3.

RCL PE Ratio (Forward) data by YCharts.

Is now a good time to buy Royal Caribbean stock?

There's a lot to like about Royal Caribbean as a leader in travel and leisure. Investors should be prepared for the occasional rough seas, but the stock could be a good addition to a diversified portfolio for the long run. As long as the global economy remains resilient, shares are well-positioned to sail higher.

Dan Victor has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy .