We recently published a list of 10 Worst Cruise Stocks to Buy Now According to Short Sellers. In this article, we are going to take a look at where Norwegian Cruise Line Holdings Ltd. (NYSE:NCLH) stands against other worst cruise stocks according to short sellers.
The cruise industry accelerated after taking a significant hit during the COVID-19 pandemic. As per the Cruise Lines International Association (CLIA), ~35.7 million passengers are anticipated to set sail in 2024. This translates to 6% growth as compared to 2019. JP Morgan Research highlighted that major cruise lines enjoyed a successful 2024 wave season between January and March when operators provided the best deals. CLIA highlighted that, in 2023, the passenger volume touched a record 31.7 million, exhibiting a rise of 7% over 2019 levels.
Wall Street experts believe that travel exchange-traded funds (ETFs) are well-placed to soar on the back of a resurgence in consumer demand for travel-related activities, supported by post-pandemic recovery and changing consumer behaviors. Amidst some short-term challenges, the long-term outlook for the travel sector is positive as a result of demographic shifts and an increased preference for experiential spending.
Positive Demographic Shifts Should Be a Primary Growth Enabler
Earlier, Baby Boomers used to make up the core consumer base for the broader cruise industry. Today, however, an increased number of younger travelers continue to come on board. As per CLIA, ~73% of Millennials and Gen X travelers mentioned that they would consider a cruise vacation. Also, a renowned cruise company has recently mentioned that half of its cruise customers are Millennials or younger. This is because of rising affluence. Moreover, according to the bank’s research, the spending capacity of Millennial customers has seen an increase of ~49% since 2019. Today, the average net worth of an individual aged 40 or under sits at ~$259K.
The cruises continue to attract more first-time passengers. The cruise companies are seeing “new-to-cruise” in their 2025 bookings, with this customer category rising by more than 30% versus a year ago.
The bank believes that cruise operators are improving and modernizing their offerings to make them appealing and highlighted that key operators continue to invest in new hardware, notably mega-ships and private destinations. This has been driving more eyeballs to the broader cruise and tourism industry, accelerating new-to-cruise acquisition. CLIA recently highlighted that the cruise industry has been deploying billions in new ships and engines which give flexibility to use low to zero-GHG fuels with little to no engine modification.
Cruises Over Land-based Activities
According to a survey by the bank’s research division held in April, only ~29% of respondents have excess savings. Notably, ~45% of the respondents are expected to spend less in discretionary categories over the upcoming 12 months. This implies an increased cautious behavior even in the environment of moderating inflation.
This scenario is placing cruise voyages, that are cheaper than land-based vacations, in a strong position. Consumers are focused on value within discretionary categories. The value spread between cruises and land-based alternatives stood at 25%-30% today as compared to 10%-15% pre-pandemic. Despite higher inflation, cruise lines continue to focus on improved experiences, without compromising quality or service. This should further enhance their value.
Despite a tough consumer spending environment, both ticket and onboard prices increased over the past few months. This means that the demand backdrop is strong for the overall cruise industry. The bank’s research shows that more than 85% of tickets have been booked for 2024, with a focus now turning to 2025 and bookings already exceeding historical levels. Moreover, the industry should grow revenues by high-single digits over the upcoming 5 years, tapping ~3.8% of the global vacation market by 2028.
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A luxurious cruise ship overlooking a stunning horizon, highlighting the variety of its itineraries.
Norwegian Cruise Line Holdings Ltd. (NYSE:NCLH)
Short % of Float (As of 15 August): 8.09%
Number of Hedge Fund Holders: 31
Norwegian Cruise Line Holdings Ltd. (NYSE:NCLH) operates a fleet of passenger cruise ships. It offers an array of cruise itineraries and theme cruises and markets its services via various distribution channels.
Short sellers believe that Norwegian Cruise Line Holdings Ltd. (NYSE:NCLH) continues to struggle with low margins, increased costs, and elevated weighted cost of capital in comparison to returns on invested capital. In 2Q 2024, the company’s total cruise operating expense came in at $1.45 billion as compared to $1.38 billion in 2Q 2023. The short sellers believe that margins for the company would be negatively impacted in 2H 2024 as costs continue to increase at a faster pace than total revenue. Also, the Red Sea sailings cancellation has impacted luxury brand performance, which has weighed upon 4Q 2024 expectations. Short sellers believe that increased oil prices and unfavorable foreign exchange might elevate costs in the remaining half of 2024.
However, Wall Street analysts believe that the strong demand for European, Caribbean, and Alaskan sailings should help it offset the short-term challenges. Norwegian Cruise Line Holdings Ltd. (NYSE:NCLH)’s optimal book position saw an improvement as a result of better analytics and revenue management tools. Market experts opine that attractive itineraries, together with tactical revenue management, and data-driven marketing should continue to fuel sales growth.
Norwegian Cruise Line Holdings Ltd. (NYSE:NCLH) continues to focus on right-sizing its cost base and improving margins to strengthen the foundation for profitable growth. Its young average fleet and solid liquidity position should continue to provide competitive advantages.
The Goldman Sachs Group upped their target price on the shares of Norwegian Cruise Line Holdings Ltd. (NYSE:NCLH) from $19.00 to $21.00, giving it a “Neutral” rating on 28th May. As per Insider Monkey’s 2Q 2024 database, 31 hedge funds reported holding stakes in the company.
Ariel Investments, an investment management company, released its 3Q 2023 investor letter and mentioned Norwegian Cruise Line Holdings Ltd. (NYSE:NCLH). Here is what the fund said:
“Lastly, Cruise ship operator, Norwegian Cruise Line Holdings Ltd. (NYSE:NCLH) traded lower in the quarter. The stocks strong price appreciation ̶up 34.64% year-to-date ̶ drove profit taking following an underwhelming outlook relative to Royal Caribbean Group’s upward guidance revision. Notably, NCLH continues to deliver record cumulative bookings as well as increased occupancy capacity at higher prices. The company remains focused on right sizing its cost base and improving margins to strengthen its foundation for sustainable and profitable growth. Meanwhile, the company executed on its leadership succession plan, with 15-year veteran, Harry J. Sommer’s recent appointment to CEO. With an experienced management team at its helm, a young average fleet and solid liquidity position, we remain enthusiastic about the name.”
Overall, NCLH ranks 6th on our list of 10 worst cruise stocks according to short sellers. While we acknowledge the potential of NCLH as an investment, our conviction lies in the belief that some deeply undervalued AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for a deeply undervalued AI stock that is more promising than the ones mentioned on our list but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.
