I was bullish on Royal Caribbean Cruises (RCL) early in 2024 but couldn’t get my hands on the stock through my brokerage at the time. I’ve missed out because the stock has surged over the past two years and is up more than 600% from its post-pandemic lows. However, my bullishness is running out of steam in parallel with growing bullish fatigue for RCL stock. I’m concerned about the company’s valuation, and although it has the potential to push higher, the stock is now priced toward its upper limit, which suggests bulls may soon be turning into bears en masse.
Royal Caribbean Cruises’ Valuation Hits New Heights
Royal Caribbean Cruises’ valuation has reached new heights, potentially leaving little room for growth. The company’s P/E ratio of 21.4x is 45% higher than the sector median, while its EV-to-sales of 5.6x is a staggering 320% above the sector median. These are just some metrics that suggest a significant premium compared to consumer discretionary peers.
The forward-looking valuations paint a slightly more moderate picture, with a forward P/E of 17.7x, only 8.2% above the sector median. However, the EV-to-sales (FWD) remains elevated at 5.1x, 292.2% above the sector median. Interestingly, Royal Caribbean’s current valuations are substantially lower than its 5-year averages. The EV-to-sales of 5.6x is 85.5% below its 5-year average of 38.3x, indicating a significant correction from historical highs.
Meanwhile, the company’s capital structure reveals a market cap of ~$70 billion, with a total debt of $21 billion and a cash pile of $388 million, resulting in an enterprise value of $91.7 billion. This leveraged position could be a concern if market conditions deteriorate, although its vessels undoubtedly represent considerable asset value.
Analysts project a declining P/E ratio, from 22.3x in 2024 to 11.3x in 2028, suggesting expectations of strong earnings growth. The consensus EPS growth estimates support this view, with projected growth rates ranging from 14.2% to 26.1% over the next four years.
RCL’s Track Record Boosts Confidence
Royal Caribbean has outperformed expectations in recent quarters, contributing to the general bullishness surrounding the stock. Royal Caribbean is expected to announce earnings for the upcoming quarter on April 29, 2025, with an EPS estimate of $2.52 and a revenue estimate of $4.02 billion. The company has seen positive momentum in analyst sentiment, with nine upward EPS revisions in the last 90 days and no downward revisions.
Royal Caribbean has established a strong track record of beating earnings estimates. Over the past eight quarters, the company has consistently surpassed EPS expectations, with beats ranging from $0.12 to $0.46 per share. The most recent quarter saw an EPS beat of $0.13 and revenue of $3.76 billion, slightly below estimates but still representing 12.9% year-over-year growth.
This consistent outperformance has likely contributed to the stock’s current high valuation. However, revenue beats have been less consistent, with some quarters falling slightly short of estimates. Despite this, the company has demonstrated strong year-over-year revenue growth, ranging from 12.9% to 172% over the past eight quarters, reflecting a robust recovery from pandemic-era lows.
A Stronger Company Than Ever Before
Royal Caribbean Cruises has staged an impressive post-pandemic recovery driven by strategic innovations and sustained consumer demand. It’s simply a much stronger company than we’ve seen before.
However, the key to this resurgence is record-breaking demand. 12-month trailing revenues have grown for 14 consecutive months, with 2024 net margins hitting 17.46% – the highest in a decade and above pre-pandemic levels. Pricing power has been critical, as premium offerings allowed Royal Caribbean to offset costs through fare increases.
Gross margin yields rose to 13.8% YoY in Q4 2024, supported by a 30% increase in onboard spending per passenger compared to 2019. Operational efficiency is evident in near-full ship occupancy, with a load factor of 108%. With this, the company transported 2.2 million passengers in Q4 2024 – an 11.3% YoY increase.
Strategic expansions have diversified revenue streams, including the 2027 launch of Celebrity River Cruises (10 ships ordered) and new private destinations like Perfect Day at CoCoCay. Moreover, Royal Caribbean’s disciplined capital management during the pandemic, including minimal equity dilution compared to peers, preserved shareholder value and enabled rapid recovery.
Is RCL Stock a Good Buy Right Now?
On Wall Street, RCL stock has a Strong Buy consensus rating based on 14 Buy, four Hold, and zero Sell ratings over the past three months. RCL’s average price target of $290.18 per share implies ~18% upside potential over the next twelve months.
RCL Has Value That Comes With a Steep Price
I’m tentatively bullish on Royal Caribbean Cruises, but only just. Priced at ~$245 per share, its valuation stretches the limits of justification. The likelihood is that the company’s revenue-rich operations, record-breaking demand, and strategic expansion solidify its industry dominance, but its current price and associated market valuation leave little room for further upside.
Bulls may find themselves long the high if opening a position at current levels. While the stock could still rise, its premium valuation requires some caution. Long-term growth prospects remain solid, but investors should be prepared for potential pullbacks if earnings growth falls short of expectations.