Royal Caribbean Stock Continues to Hit All-Time Highs. Can the Growth Story Continue?

Key Points

• Royal Caribbean has been a big winner of the surge in cruise demand.

• Newer ships and experiences have been excellent revenue drivers for the company.

• If demand stays high, there could be more upside ahead for Royal Caribbean investors.

• 10 stocks we like better than Royal Caribbean Cruises ›

Cruise lines were among the hardest hit industries during the COVID-19 pandemic. Not only were they essentially not allowed to operate for an extended period of time, but maintaining a fleet of massive ships is a capital-intensive activity. Not surprisingly, most cruise lines saw their debt levels balloon during the pandemic shutdowns, and Royal Caribbean (NYSE: RCL) was no exception.

However, to say that Royal Caribbean's rebound has been impressive would be a massive understatement. Thanks to massive demand for cruises, several well-received new ships and innovations, and generally smart leadership, Royal Caribbean's revenue is about 60% higher than it ever was before the pandemic hit.

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Image source: Getty Images.

Investors have been handsomely rewarded. Over the past five years, Royal Caribbean has produced a 428% total return for patient investors, and the stock has more than doubled over the past year alone. As I'm writing this, Royal Caribbean is only about 2% below its all-time high. So why has the cruise leader's performance been so strong, and is now still a good time to invest?

Why has Royal Caribbean performed so well?

The short answer is that demand for cruises surged after pandemic-era restrictions started to end, and it continues to remain elevated.

Not only has industry demand been strong, but Royal Caribbean has also launched some of the most popular ships in the industry in recent years. This includes the massive Icon of the Seas and Star of the Seas ships, which currently share the title of the largest cruise ships in the world. The company has also invested hundreds of millions of dollars in its class-leading private island, Perfect Day at CocoCay. In short, Royal Caribbean's recent capital investment strategy has paid off nicely.

Royal Caribbean has also made some seemingly 'risky' moves that have paid off nicely, such as using a brand-new mega-ship, Utopia of the Seas, exclusively for short cruises. The idea was to put the cruise line's best foot forward for those who might be new to cruising or who want to travel but can't commit to a weeklong cruise.

Finally, the company's capital allocation strategy, especially when it comes to strengthening the balance sheet, is paying off. Royal Caribbean's long-term debt skyrocketed from $9 billion in 2019 to nearly $22 billion by 2022. It has since been reduced by about $3.5 billion, and Royal Caribbean has received investment-grade credit ratings this year.

Is now still a good time to invest?

If cruise demand remains strong, there could certainly be some major upside ahead. The company has several new megaships in the works, including the third of its Icon-class, the Legend of the Seas, which is set to launch next year, and Celebrity Xcel, which is set to become the flagship of its high-end Celebrity brand. The cruise line is also rolling out its first ever private beach club in Nassau, Bahamas, with others expected to follow shortly. In short, if demand remains high, Royal Caribbean will have plenty of ways to take advantage of it.

Royal Caribbean grew its sales by 19% year-over-year in 2024, and in the most recent quarter, the company reported 42% EPS growth, and management expects full-year growth of about 31%. If the company can sustain an elevated level of growth, the current valuation of about 21 times forward earnings could be an attractive entry point. However, that's a big "if," and there's no guarantee that demand will remain as strong as it has been, especially if the U.S. economy weakens.

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Matt Frankel has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.