Royal Caribbean continues to reach historic highs. Can this growth story continue?

Key Points

• Royal Caribbean has been a major beneficiary of the increase in demand for cruises.
• The newest ships and exclusive experiences have excellently boosted revenues.
• If demand remains high, there could be more potential for investors.

Cruise lines were one of the industries most affected during the pandemic. Not only were they practically prohibited from operating for a long period, but maintaining a fleet of huge ships requires intense capital. As expected, most cruise lines saw their debt levels skyrocket, and Royal Caribbean was no exception.

However, to say that Royal Caribbean's recovery has been impressive would be an understatement. Thanks to the huge demand for cruises, several well-received new ships, and smart leadership, Royal Caribbean's revenue is approximately 60% higher than before the pandemic.

Investors have been generously rewarded. In the last five years, Royal Caribbean has produced a total return of 428% for patient investors, and the shares have more than doubled in just the last year. As I write this, Royal Caribbean is only about 2% below its all-time high.

Why has Royal Caribbean performed so well?

The short answer is that the demand for cruises surged after the end of pandemic restrictions and continues to remain high.

Royal Caribbean has launched some of the most popular ships in the industry in recent years, including the massive “Icon of the Seas” and “Star of the Seas,” which share the title of the largest cruise ships in the world. The company has also invested hundreds of millions in its private island, “Perfect Day at CocoCay.”

It has also made seemingly “risky” decisions that have paid off, such as using a new mega-ship, “Utopia of the Seas”, exclusively for short cruises, ideal for those who are new to cruising or cannot commit to a week-long trip.

Finally, its capital allocation strategy is paying off. Royal Caribbean's long-term debt skyrocketed from $9 billion in 2019 to nearly $22 billion in 2022. Since then, it has been reduced by approximately $3.5 billion, and the company has received investment-grade credit ratings this year.

Is it a good time to invest?

If the demand for cruises remains strong, there could certainly be great potential. The company has several new mega-ships in development, including the third in its “Icon” class, the “Legend of the Seas,” which will launch next year, and the “Celebrity Xcel.” The cruise line is also opening its first private beach club in Nassau, Bahamas, with others expected to follow soon.

Royal Caribbean increased its sales by 19% year-over-year in 2024, and in the last quarter, it reported a 42% growth in earnings per share. Management expects an annual growth of approximately 31%. If the company can maintain this high level of growth, the current valuation of approximately 21 times future earnings could be an attractive entry point. However, that is a big “if,” and there is no guarantee that demand will remain as strong as it has been, especially if the U.S. economy weakens.