Royal Caribbean (NYSE:RCL) has been absolutely hammered over the past month amid the novel coronavirus pandemic. RCL stock is down a stark 74 percent so far this year and will almost certainly keep falling amid travel shutdowns, quarantines and the economic fallout from Covid-19.
Contrarians have been sniffing around cruise stocks in recent weeks amid talk of restarting the economy, but coronavirus had done lasting damage to the industry making this it a risky place to put your money.
While I don’t think the cruise industry will be wiped out completely, I do think it will be forever changed. Over the next few months, some operators will likely go into administration and the sector will emerge with battle scars. Investors should be hesitant to put any money into RCL stock.
Uncertainty Looms for RCL Stock Investors
Perhaps the most troubling aspect for Royal Carribean right now is the fact that no one knows when they’ll be allowed to resume operations. Even worse, we don’t know that when they’re given the green-light people will actually go.
There are two factors that will determine whether the demand for cruises recovers. The first is the economy. In the absence of a vaccine, most agree we are likely to endure months more of rolling shutdowns as the world tries to manage coronavirus and avoid another spike in cases. And even as lockdowns are lifted, large gatherings will likely be limited for the foreseeable future.
Coronavirus Will Keep Ships in Port…
For now the industry is barred from sailing for 100 days, meaning cruises can’t resume until early July. For now, Royal Caribbean has cancelled cruises through June 30 but the firm says it’s hopeful that it will resume cruises out of Barcelona in August.
It’s possible that cruising will be re-allowed in August, but unlikely. For now there’s no evidence that a coronavirus vaccine will be viable by then. There’s also some question as to how accurate antibody tests are and whether or not coronavirus immunity even exists. With that in mind, risking public health by putting hundreds of people in close quarters on a leisure ship doesn’t sound like a first priority as the economy chugs back to life.
Plus, even if coronavirus is eradicated, people are likely to be hesitant to take a cruise any time soon. Over the past month horrific accounts of being stuck at sea or docked in a foreign country while your fellow passengers fall ill, and in some cases die, is likely to have dulled the shine on luxury cruise holidays. Travel and hospitality of all kinds will suffer from coronavirus, but cruises are likely to be the hardest hit.
Wedbush’s James Hardiman said he believes a portion of Royal Caribbean and other cruise lines’s addressable market has been lost amid this pandemic:
“I think there is a real possibility that the cruise industry has been permanently impaired. There’s a segment of the population that, even once we have a vaccine, will be hesitant to ever get on a cruise ship. Just based on all of these headlines that we’ve seen and just this latent fear that you’re going to be somehow stuck, not able to come back to your home country, that there would be some sort of a viral outbreak, even if it’s not coronavirus.”
And Economic Pain Will Keep Consumers at Home
On top of that, you have one of the most painful economic downturns of all times causing consumers to tighten their pursestrings. Again, cruising is likely going to be one of the last segments to recover once people get out and start spending.
That’s because it’s expensive and time-consuming to go on a crusie. Not only do you have to pay for your stay on the ship, but you have flights and accommodation to get to the port. While demand for cruises may return, it won’t return in earnest until jobless rates are low and people have a disposable income again.
The Bottom Line
It’s worth noting that if you pick up a cruise stock now and it doesn’t go into bankruptcy, you’re looking at impressive returns over the next year as demand starts to pick up. However, there’s a good chance you are picking up a company that’s about to go under.
For now, with uncertainty surrounding a potential second wave of coronavirus outbreaks, RCL stock is simply too risky — as are the rest of its peers. The only thing riskier than buying RCL stock right now would be going on an actual cruise.
Laura Hoy has a Finance degree from Duquesne University and has been writing about financial markets for the past 8 years. Her work can be seen in a variety of publications including InvestorPlace, Benzinga, Yahoo Finance and CCN. As of this writing, Laura Hoy did not hold a position in any of the aforementioned securities.