Where Will Carnival Stock Be in 5 Years?

With shares down by a whopping 61% since 2019, Carnival Corporation (NYSE: CCL) stock has decimated the unfortunate shareholders who held shares before the COVID-19 pandemic. But now, trading for just $18 per share, does the low price tag make its stock a buy? Let's explore what the next half-decade could have in store for this iconic cruise company .

Trying to escape the shadow of COVID

Although it may feel hard to believe, it has already been over four years since the COVID-19 pandemic turned the world upside down. Cruise companies like Carnival were among the worst affected as no-sail orders and other activity restrictions grounded their business models for several years. But now, demand has fully bounced back from the crisis.

Second-quarter revenue jumped by almost 18% to $5.8 billion, driven by booming passenger ticket sales and consumer spending on food, drinks, and experiences on voyages. The company's operating income rose almost fivefold from $120 million to $560 million. To put these numbers in a pre-pandemic context, Carnival generated revenue of $4.8 million and operating income of $515 million in the second quarter of 2019.

The balance sheet is still a mess

In terms of revenue and operating income, Carnival has fully recovered from the COVID-19 pandemic -- although the 21% rise in consumer prices since 2020 (inflation) makes this less impressive.

The situation also looks much worse when we consider the balance sheet. Carnival took on a huge amount of debt to maintain operations in 2020 and 2021. And the company is far from fixing this challenge. Carnival's long-term debt currently stands at an eye-watering $27.2 billion, significantly more than its market capitalization of $22.8 billion.

Not only will this money have to be paid back, but it also generates significant interest expense, which eats into Carnival's profitability.

Image source: Getty Images.

In the second quarter, Carnival shelled out $450 million on interest expense alone. This is a massive drag on the company's bottom line because most of its operating income is going to interest payments on debt -- before even calculating the principal payments on the debt or capital expenditures like buying or maintaining vessels. When it is all said and done, there won't be much left over for common shareholders.

And while Carnival boasts $1.6 billion in cash and equivalents on its balance sheet, this is just a drop in the bucket compared to its commitments and likely wouldn't even cover a year of interest payments.

Carnival stock is not a buy

With a forward price-to-earnings (P/E) multiple of 17, Carnival trades lower than the S&P 500 estimate of 23. But while this may look cheap on the surface, the discount isn't big enough considering the company's massive debt load, which will pose a constant drain on its cash flow and increase the risk of default if macroeconomic conditions worsen.

Vacation cruises are a discretionary luxury purchase that people can easily cut back on when money is tight, so this is a very real risk for the industry as a whole . With all this in mind, Carnival stock is too expensive and looks likely to underperform the market over the next five years and possibly beyond.

Will Ebiefung has no position in any of the stocks mentioned. The Motley Fool recommends Carnival Corp. The Motley Fool has a disclosure policy .