Cruise Line Stocks Make Huge Gains As Demand Soars

Key takeaways

• Cruise liner companies Carnival and Royal Caribbean are two of the five biggest-gaining stocks on the S&P 500 this year alongside Tesla, Nvidia and Meta
• Carnival saw a 50% increase just this month as pent-up consumer demand unleashed itself on the sector
• Royal Caribbean has enjoyed a 107% rise this year so far, with both companies reporting stellar quarterly earnings

Forget the Big Tech stocks of Nvidia, Tesla and Meta – two cruise lines have seen just as much growth, even without the help of the generative AI halo effect. Carnival and Royal Caribbean have seen huge uplifts to their share prices in 2023 and have the earnings reports to back up the buoyancy.

After three years of pent-up demand, travel would inevitably pick up again and investors can’t get enough of the two cruise stocks. But a recession and the longer-term climate change factor might sink the ship on consumer spending for cruises. We’ve got the details below.

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Why are cruise line stocks up in 2023?

Cruise lines were one of the hardest hit industries by the pandemic, as shelter-in-place orders, successive global lockdowns and countries shutting their borders meant the sector’s shares tanked. Now, there’s been a tidal wave of demand to turn around the companies’ fortunes.

There’s also been a fairly unique phenomenon where even though the ailing economy is forcing households to cut back on spending, close to three years of lockdowns have unleashed the pent-up demand for cruises and holidays. JPMorgan data revealed an 80 basis point rise in cruises and flight travel compared to last year.

There’s also room for the share prices to grow, as both are still trading under their pre-pandemic heights. In January 2020, Carnival hit trading prices of almost $52, whereas Royal Caribbean was going for $135. The 2023 upwards trajectory is a good sign, but investors are increasingly confident the stocks can return to their former glory – and even surpass it.

The market reaction

As a result, Carnival and Royal Caribbean are two of the top-five stock performers on the S&P 500 this year. Carnival has gained 115% in 2023 and is currently trading at $17.16, while Royal Caribbean has soared 107.6% in the same period to hit $102.4.

JPMorgan and the Bank of America upgraded their ratings for Carnival and Royal Caribbean stock last week because record bookings and low cancellation rates buoyed the sector.

Carnival’s puzzling earnings report sell-off

In a turn of events, the stocks have lost some of their gains this week. Carnival stock sank 11% on Monday, close to its largest percentage decrease since November last year and becoming the worst performer on the S&P 500 that day.

On the face of it, it’s a head-scratcher, given how good the earnings report was. The cruise line recorded a Q2 loss of 32 cents a share, compared to the 33 cents expected. Compared to last year’s results, where Carnival posted a loss of $1.61 a share, this is a huge step up for the company. Carnival also bumped its full-year outlook for the second quarter in a row, and revenue nearly doubled.

So why was there such a big loss? Wall Street decided to “sell the news”, which is when good news is already expected and so it’s already priced into the shares. It doesn’t seem to have hurt Carnival’s share price growth much – the stock has seen a 54% climb in June alone, which is set to be the biggest one-month gain since it went public in 1987.

Royal Caribbean’s latest earnings beat

The Miami-based cruise line has seen similar growth to Carnival. Last month on the company’s Q1 earnings call, CEO Jason Liberty said “numerous tailwinds related to the consumer’s desire to travel” had led to a recovery for the cruise line. Revenue hit $2.9 billion for the quarter, while EBITDA was up to $642 million. Bookings were at 1.9 million vacations, surpassing 2019 levels, and its earnings per share guidance lower-end range were raised to $3 to $4.40.

At the time, the stock gained 5.3% in pre-trading, while continued performance has translated to a 28.2% boost to the share price over the last month.

What could affect cruise line stocks in the future?

While the stock gains are great, and there’s potential for further uplift, a couple of factors could scupper the cruise line industry’s stellar performance.

Recession

While consumer travel spending isn’t impacted yet, there’s the chance rate increases maybe be the final nail in the coffin as household budgets shrink even further. The Fed has indicated we could see two more rate increases by the end of the year, with chair Jerome Powell confirming earlier this week that even consecutive rate increases weren’t off the table.

Core inflation is starting to look sticky, coming in at 5.3% for May compared to 5.5% for April. While headline inflation has cooled rapidly, Powell also believes inflation won’t return to the 2% target until 2025.

Higher interest rates make borrowing more expensive for businesses and households, which could push up unemployment rates in the U.S. and further curb consumer spending. If this happens, expect the bottom lines of these luxury cruise lines to falter.

Climate change

Climate change is an undeniable, long-term factor that could impact cruise stocks and other forms of travel.

A few weeks ago, we saw most of New York turn into a scene from Blade Runner, as wildfire smoke from Canada forced everyone to stay inside because the air quality was so bad. Now that’s happening again in the run-up to the July Fourth long weekend, which is one of the busiest times of the year for airplane travel – around 2.8 million people are anticipated to pass through U.S. airports on Friday.

This is actually a boost for potential cruise line bookings, as delays, extra costs and cancellations for consumers have dogged international air travel. But a 2021 study found cruise ships produce as many greenhouse gas emissions as 12,000 cars, so the industry’s reputation might suffer if consumer sentiment turns towards greener ways of travel.

The bottom line

Carnival and Royal Caribbean are sailing towards a brighter future right now, but there are clouds on the horizon for investors if consumer sentiment changes around cruising’s climate change impact and if a recession stops consumer spending. There’s still plenty of upside for investors to catch on the two cruise lines if they’re looking to return to their pre-pandemic stock highs.

Cruise line stocks might fly high this year, but inflation could scupper their gains. It doesn’t have to be the same for your portfolio with Q.ai’s Inflation Protection Kit, which utilizes AI to analyze weekly data and predict which assets, such as TIPS, precious metals, and commodities, could offer inflation resistance and potential returns, streamlining your investment process.

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