Stock Analysis & Ideas

Royal Caribbean: Poised to Cruise Higher Post Omicron?

Shares of hard-hit cruise line company Royal Caribbean Cruises (RCL) have been retreating lower again alongside most other aggressive reopening plays that seem to move in tandem these days. RCL stock is now off around 25% from its 52-week highs and 45% from its pre-pandemic all-time high. With the Omicron variant of COVID-19 showing signs of peaking, all eyes will be on the between-wave reopening and what could be up next.

With such an aggressive reopening company, the stock will be a significant mover in anticipation of what comes next with the pandemic. While Omicron could be the last major wave before we move into endemic territory, there’s also a big chance that post-Omicron optimism may be overblown.

It’s nice to be optimistic, but further waves could be in the cards, and a move into endemic may be further off than health experts expect.

The disruptive impact of another big wave could be detrimental to the cruise lines, especially if summer sailing gets mostly canceled. Royal Caribbean has managed through the perfect storm of headwinds the best it could, though. Once the time comes, RCL stock is likely to be flying higher again, as pent-up demand for cruising can be safely met.

However, given today’s massive exogenous uncertainties, I am neutral on the stock.

Royal Caribbean: Cruising in the New Normal?

Royal Caribbean’s management team cannot control the next steps of this pandemic. What it can control are heath and safety protocols to improve the safety of its passengers to help lower the transmissibility of COVID-19 aboard its sailing ships. The company has done a respectable job of doing all it can to keep its customers and employees safe, with sanitization, masking, and all the sort.

With President Joe Biden making around 400 million N95 masks more available to the American population, while COVID-19 testing has become more commonplace, it is possible to lower the risk of high-risk activities such as cruising.

Indeed, strict safety procedures may be inconvenient, but extra strictness with such protocol could keep a majority of ships sailing between major waves of COVID-19. Add booster shots and after-infection treatments into the equation, and the thesis for cruise lines is improving, even assuming more future waves after Omicron’s is over with.

Many of us are sick of the pandemic. Even if it doesn’t go endemic in 2022 or 2023, Royal Caribbean has trimmed its expenses such that it’s more economical amid these brutal conditions. With a good amount of cash on the balance sheet, the company is no longer under the same stress and uncertainty as it was in the early innings of 2020.

It’s Not Just Pandemic Risks

The number one question mark with cruise lines is when will the pandemic end? A bull-case scenario could see it end in late 2022 or early 2023. Even if such a scenario does happen, Royal Caribbean may not necessarily be in the clear to soar back to its all-time highs, especially if the U.S. Federal Reserve makes a misstep and triggers a recession in its hawkish battle against high inflation.

Although the odds of a recession seem low, the Fed has a difficult job with the balancing of accommodating higher employment and tempering inflation. With four or five rate hikes potentially in the cards for this year, all eyes will be on corporate earnings and the potential impact of rate hikes.

Should economic growth fall short, expect cruise lines to be dragged lower, even if the pandemic becomes more manageable. Indeed, cruise lines are discretionaries that could take a beating once economic growth takes a turn for the worst.

Wall Street’s Take

Turning to Wall Street, RCL stock comes in as a Hold. Out of six analyst ratings, there has been one Buy, four Holds, and one Sell recommendation.

The average Royal Caribbean Cruise price target is $89.20, implying an upside potential of 20.6%. Analyst price targets range from a low of $75.00 per share to a high of $130.00 per share.

The Bottom Line on Royal Caribbean Cruise Stock

As with most cyclical plays, RCL stock is tough to evaluate, given question marks facing the economy’s future as it faces a rising-rate environment. Economic growth and pandemic uncertainties make RCL stock a giant question mark right now.

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