Royal Caribbean has been treading water for the past six months, recording a small return of 3.4% while holding steady at $257.76. The stock also fell short of the S&P 500’s 11.3% gain during that period.

Is now the time to buy RCL? Or does the price properly account for its business quality and fundamentals? Find out in our full research report, it’s free for active Edge members.

Why Does RCL Stock Spark Debate?

Established in 1968, Royal Caribbean Cruises (NYSE: RCL) is a global cruise vacation company renowned for its innovative and exciting cruise experiences.

Two Things to Like:

1. Skyrocketing Revenue Shows Strong Momentum

Examining a company’s long-term performance can provide clues about its quality. Any business can have short-term success, but a top-tier one grows for years. Over the last five years, Royal Caribbean grew its sales at an incredible 30% compounded annual growth rate. Its growth beat the average consumer discretionary company and shows its offerings resonate with customers.

2. New Investments Bear Fruit as ROIC Jumps

ROIC, or return on invested capital, is a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).

We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Over the last few years, Royal Caribbean’s ROIC has increased. This is a good sign, but we recognize its lack of profitable growth during the COVID era was the primary reason for the change.

One Reason to be Careful:

Weak Growth in Passenger Cruise Days Points to Soft Demand

Revenue growth can be broken down into changes in price and volume (for companies like Royal Caribbean, our preferred volume metric is passenger cruise days). While both are important, the latter is the most critical to analyze because prices have a ceiling.

Royal Caribbean’s passenger cruise days came in at 15.36 million in the latest quarter, and over the last two years, averaged 9.2% year-on-year growth. This performance was underwhelming and suggests it might have to lower prices or invest in product improvements to accelerate growth, factors that can hinder near-term profitability.

Final Judgment

Royal Caribbean has huge potential even though it has some open questions. With its shares underperforming the market lately, the stock trades at 14.5× forward P/E (or $257.76 per share). Is now a good time to initiate a position? See for yourself in our full research report, it’s free for active Edge members.

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