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 Royal Caribbean Cruises Ltd. (NYSE:RCL) 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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An aerial view of a luxurious cruise ship, surrounded by the blue horizon.
Royal Caribbean Cruises Ltd. (NYSE:RCL)
Short % of Float (As of 15 August): 8.78%
Number of Hedge Fund Holders: 48
Royal Caribbean Cruises Ltd. (NYSE:RCL) operates as a global cruise company. It operates through brands that mainly serve the contemporary, premium, and deluxe segments of the cruise vacation industry.
Short sellers believe that the company’s valuations have outpaced its fundamentals, as Royal Caribbean Cruises Ltd. (NYSE:RCL)’s stock trades at ~11.99x its forward earnings, while the sectoral average remains at ~7.75x. Another issue that might impact the company’s margins in 2H 2024 is its debt burden and the resulting interest expenses. As of the end of 2Q 2024, its long-term debt sat at over ~19 billion. Apart from this, it has long-term operating lease liabilities and other long-term liabilities of $591 million and $522 million, respectively. For FY 2024, Royal Caribbean Cruises Ltd. (NYSE:RCL) expects its NCC (Net Cruise Costs), excluding Fuel, per APCD to increase approximately 6.0% in constant currency and as-reported.
Wall Street analysts believe that Royal Caribbean Cruises Ltd. (NYSE:RCL)’s stock is well-placed to see strong growth in 2H 2024 as optimized occupancy and productivity initiatives should keep a check on the company’s costs over the long term. Also, consumer interest in travel maintained momentum for Royal Caribbean Cruises Ltd. (NYSE:RCL) in 2024, continuing the healthy demand and strong pricing trends in the business.
The redeployment of the fleet was wrapped up in mid-2022, with occupancy returning to historical levels. These factors led to the normalization of profits and cash flow. Royal Caribbean Cruises Ltd. (NYSE:RCL) saw record pricing in 2023 (13% above its 2019 level), with further growth anticipated moving forward, given strong booking patterns and price levels as a result of a healthy consumer appetite.
Analysts at UBS Group increased their target price on the shares of Royal Caribbean Cruises Ltd. (NYSE:RCL) from $168.00 to $183.00, giving it a “Buy” rating on 31st July. Notably, 48 hedge funds held stakes in the company.
Ariel Investments, an investment management company, released its second-quarter 2024 investor letter. Here is what the fund said:
“Global cruise vacation company, Royal Caribbean Cruises Ltd. (NYSE:RCL), advanced on another quarterly earnings beat and subsequent raise in full-year guidance. Stronger than anticipated consumer demand, healthy onboard spend, robust pricing and solid cost containment lifted recent results. Additionally, RCL is benefitting from several new megaships, more island destinations and re-entry into the China market. The resiliency of the core cruise consumer, in combination with management’s superior operational expertise and revised earnings outlook, lays the foundation for RCL to exceed its three-year strategic imperative, the Trifecta Program, a year earlier than expected.”
Overall, RSL ranks 4th on our list of 10 worst cruise stocks according to short sellers. While we acknowledge the potential of RCL 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.
