The steep sell-off Carnival (NYSE: CCL) stock suffered when the COVID-19 pandemic first took hold in early 2020 made sense at the time. After all, even if people had been allowed to travel, most of them wouldn't have wanted to. Carnival's business collapsed, pushing it into the red for well over a year.
The fact that shares are still down 67% from their pre-pandemic peak and (more or less) in line with 2020's low, however, doesn't make as much sense. Carnival's business is booming again, even more than it was prior to the pandemic. There's no sign of a slowdown on the horizon, either.
So, don't overthink it. Step in now while you still can at this price, before any more investors realize this ticker is undervalued.
Torpedoed, but only temporarily
It's an all-too-familiar tale. The coronavirus pandemic wrecked the leisure cruise business for a while, like it did almost every other industry. Carnival was no exception.
Like most other industries, though, this one recovered. And again, Carnival was no exception. Last year's top line of $21.6 billion wasn't just 77% better than 2022's revenue. It was record-breaking . The company's on pace to generate $25 billion in sales this year, and is looking for more than $26 billion next year. It's also profitable again, and increasingly so.
CCL Revenue (Quarterly) data by YCharts.
Indeed, the only thing holding sales and earnings back is a lack of boats, but more of them are on the way as well. The parent to Aida, Costa, and Carnival has ordered six new ships to be delivered over the course of the coming nine years, expanding its current fleet of 27 vessels.
These aren't exactly speculative purchases, either. The company's selling trips as successfully as it ever has, if not more so. Nearly half of next year's cruises are already booked, leaving even less inventory than was available at this time last year. Put another way, Carnival's total trip deposits of $6.8 billion as of the end of the third quarter was yet another record for the quarter in question.
Yet, the stock's still having trouble.
What gives?
In simplest terms, the market seems to have come to the wrong conclusion about the leisure cruise business 's resiliency. A correction of the mistake may also be in the offing.
Trade winds are blowing in Carnival stock's favor
If the economy is on the ropes, someone forgot to tell consumers.
Take August's retail sales within the U.S. as an example. They were up 2.1%, more or less in line with wage growth. Economists recently upped their Q3 GDP growth estimate for the U.S. as well, from 2.5% to 3%, matching Q2's final figure. Goldman Sachs also recently lowered its odds of a recession taking shape within the next 12 months from 20% to 15%.
Connect the dots. That's not exactly troubling.
Perhaps more pertinent to investors considering a new stake in Carnival is that would-be travelers are just as interested in leisure cruises as they were a year ago.
Deloitte's September survey of U.S. consumers puts things in perspective. It indicates that 18% of them intend to book a cruise within the next three months, matching the average seen since late 2021, when this form of tourism travel finally resumed. Meanwhile, the Cruise Lines International Association says that the industry is set to handle 34.7 million passengers this year, topping last year's record of 31.7 million, en route to 39.7 million in 2027. In terms of revenue, market research outfit Mordor Intelligence believes the leisure cruise industry is set to grow at an average annualized pace of 8.7% through 2029.
That being said, perhaps Carnival stock is an especially good buy here -- not because the economy is red hot, but because it's just so-so, and likely to remain merely lukewarm for a while as inflation continues cooling. As JPMorgan Chase 's Head of Leisure and Retailing Matt Boss recently noted: "We see the consumer increasingly focused on value within discretionary categories, with the value spread between cruises and land-based alternatives standing at 25–30% today versus 10–15% pre-pandemic."
This would certainly explain Carnival's continued growth and pricing power.
The reward is worth the risk
A risk-free investment? No, there's no such thing. Carnival's risk is arguably above-average, in fact, given the $26.6 billion worth of long-term debt now sitting on its balance sheet thanks to heavy borrowing the company did during and because of the pandemic. This debt is costing the company on the order of $400 million in interest per quarter, for perspective, compared to Q3's $2.2 billion worth of pre-interest-payment operating income.
In other words, this debt is nothing to shrug off.
On the flipside, Carnival's bottom line is now growing even faster than its top line is, with more of the same in the cards for both.
Data source: StockAnalysis.com. Chart by author.
This is allowing the company to slowly but surely pay this debt down, which it should be able to do more aggressively going forward as its business and bottom line ease their way back to normal. If that's what's holding the stock down, don't be surprised to see it stop doing so sooner rather than later. The market just wants to see a little more of this progress.
More to the point, although there's still above-average risk here, there's also above-average upside potential from Carnival stock.
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JPMorgan Chase is an advertising partner of The Ascent, a Motley Fool company. James Brumley has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Goldman Sachs Group and JPMorgan Chase. The Motley Fool recommends Carnival Corp. The Motley Fool has a disclosure policy .
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