Is Royal Caribbean Stock a Buy After a 13% Drop in 2 Days?

Sometimes a "beat and raise" performance isn't enough. Royal Caribbean (NYSE: RCL) seemed to make a splash after posting better than expected third-quarter results on Tuesday morning. It also once again boosted its full-year bottom-line outlook. Unfortunately, that splash was actually a belly flop.

Shares of Royal Caribbean have plummeted 13% in the two trading days since offering up fresh financials. The world's most valuable cruise line stock by market cap -- and the second largest player by fleet and volume -- has seen at least a half dozen analysts slash their price targets following Tuesday morning's update.

Dive deeper and you begin to see what has Wall Street pros cooling on the cruise line operator. It's worth noting that none of them are outright downgrading the stock, but the optimism is waning. Is this narrative changing for a stock is still a five bagger over the past five years with a 33% jump over the past year? Is this week's pullback a buying opportunity? Let's go cruising for answers.

Image source: Getty Images.

Breaking its crown

The seasonally potent third quarter was solid in many ways. Revenue rose 5% to $5.14 billion, its weakest quarterly growth that Royal Caribbean has posted in more than four years. It was marginally below the $5.17 billion that analysts were expecting, but it's not a deal breaker.

Revenue had risen 7% and 10% for the cruise line operator's first two quarters, so the market was ready for lightness on the top line. We're at the phase following the post-pandemic recovery where the revenge travel spike starts to stabilize. Rival Carnival (NYSE: CCL) -- operating on a fiscal year that ends a month earlier -- posted a 3% year-over-year increase in revenue last month.

The bottom line was a better story. Royal Caribbean's adjusted net income climbed 11% to reach $5.75 a share, comfortably ahead of Wall Street pros who were targeting an adjusted profit of $5.68 a share. This has been par for the course, with Royal Caribbean consistently landing ahead of market expectations since restarting operations coming out of the prolonged COVID-19 shutdown.

The cherry on top of the bottom-line beat is that Royal Caribbean raised its full-year outlook as it has following each of this year's previous financial updates. Here is how the travel and tourism stock's adjusted earnings per share guidance for 2025 has looked following its last four quarterly results:

• Q4 2024: $14.35 to $14.65
• Q1 2025: $14.55 to $15.55
• Q2 2025: $15.41 to $15.55
• Q3 2025: $15.58 to $15.63

The midpoint of its range has increased by 15% as the year played out. Royal Caribbean's adjusted profit for 2025 is now expected to be a 32% jump over last year's bottom line.

It wasn't all good news at the bottom of the income statement. Analysts were a little more ambitious on their profit projections for the fourth quarter and all of 2025, as recent hurricanes have proven disruptive to the cruise industry. It was still technically another "beat and raise" on the bottom line.

The water is fine

Analysts taking a more cautious approach following the report have their concerns. The six firms point to setbacks including slowing revenue yields and weaker earnings growth in 2026, but even after tweaking price targets lower, a couple of them see the sell-off as a buying opportunity for the leader in its field.

Royal Caribbean didn't officially introduce a forecast for 2026, but it did mention a "$17 handle" in adjusted net income for next year. This translates into earning $17-ish in 2026. This is below the $18.16 a share that analysts were modeling, but resetting expectations lower isn't a bullish thesis buster. At a midpoint of $17.50 per share, it would still find Royal Caribbean growing its adjusted earnings by 12% in a year of stabilization. A forward earnings multiple of 16 is pretty attractive in this environment of elevated valuations.

This continues to be the class act among the three major cruise line operators. It has historically checked in with the strongest revenue growth, widest profit margins, and ultimately the largest stock gains.

It was the first of the three to turn profitable in 2023. Royal Caribbean resumed paying dividend in 2024, and has already doubled the payout rate after a pair of hikes. It has returned $1.6 billion to investors in the form of rising dividends and stock buybacks. Revenue, earnings, and booking deposits for future sailings have never been higher at this point in the year. The quarter itself may have had some humbling elements on the itinerary, but it continues to be an appealing long-term buy.

Rick Munarriz has positions in Royal Caribbean Cruises. The Motley Fool recommends Carnival Corp. The Motley Fool has a disclosure policy.