Like all cruise line stocks, Royal Caribbean (NYSE:RCL) stock got punished at the onset of the novel coronavirus. Remember, RCL stock was sitting at a lofty $130 per share. There was a lot of profit for investors to take.
The question is what comes next. Cruise lines are shut down until June 30 — if not much longer. That means that cruise lines are receiving no revenue until July 1. And even after that it will likely be 2021 until the industry sees any semblance of regular traffic.
Not surprisingly, Royal Caribbean pushed its first-quarter earnings back one week to May 13, 2020. The outlook is bleak. The whisper number is a loss of 58 cents per share. But the market has largely already factored that in. That explains why RCL stock is up almost 70% in the last month.
But with a share price currently near $41 per share, it’s fair to ask if this is as good as it gets for investors. It seems to me the question is not if RCL stock can get back to $130, but whether it should have ever been that high to begin with?
It Will Take Time for the Cruise Industry to Adapt
In the year after the terrorist attacks of 9/11, the airline industry went through a transformational change. Yes, there were some consumers who were afraid to fly. But the larger issue was that flying became less convenient. And aside from demand by the business traveler, many consumers who didn’t have to fly chose not to.
However something happened on the way to writing the airline industry’s obituary — the private sector adapted. Companies pioneered solutions that made flying less of a hassle. And once that happened, the on-the-fence customers returned.
And that will ultimately be the future of cruising. As InvestorPlace’s Laura Hoy points out, there will be a group of consumers who will take a wait-and-see attitude toward cruising. However, Royal Caribbean is already taking steps such as applying for a trademark on its proprietary face mask (Seaface). That is the first of what undoubtedly will be many steps taken to ensure customer loyalty.
Is There Pent-Up Demand?
As they take these steps, the cruise lines will come back. And if reports are to be believed, there is pent-up demand to travel. I believe that. But that doesn’t mean they are ready to get on a cruise.
In fact, 57% of the respondents in a Travel Pulse survey said they will not take a cruise for at least a year.
Ultimately the question of what’s right or wrong is a personal choice. The individuals who don’t want to cruise, won’t. Those that want to, will. Those lines in the sand were drawn a long time ago. In fact, InvestorPlace‘s Will Ashworth used a similar argument in taking a very bullish stance on RCL stock.
RCL Stock Will Carry an Even Higher Risk Premium
I don’t quite share Ashworth’s optimism. While travelers may have short memories, they can’t take a mode of transportation that’s not available. And they can’t sail to ports of call whose borders are closed. That’s why until there’s a clear line of sight on when the cruise lines will be back in business, it’s impossible to truly gauge demand.
As the pandemic broke out, Royal Caribbean estimated it had seven months of cash on its balance sheet at zero revenue. And if the company cuts or eliminates its dividend, it can gain even more time. But even if you’re the brightest optimist, Royal Caribbean faces the very real prospect of a bankruptcy filing.
But by itself that doesn’t mean that there’s no hope for RCL stock. As InvestorPlace‘s Todd Shriber wrote, Royal Caribbean does have strong brand equity that may be meaningful if consumers believe it is the best of a flawed bunch.
But I also believe that Royal Caribbean will be careful to ensure it is even better protected against another “black swan” event. And part of that means major investment in creating a “safety first” infrastructure that will be expensive.
So if you’re going to invest in RCL stock, you have to be in it for the long haul. Because it may be years before the industry is back to what just a few months ago was considered normal. And even when the ships start to sail, it seems unlikely that RCL will return to those lofty heights near $130.
Chris Markoch is a freelance financial copywriter who has been covering the market for over five years. He has been writing for InvestorPlace since 2019. As of this writing, Chris Markoch did not hold a position in any of the aforementioned securities.
