Over the past six months, Norwegian Cruise Line’s stock price fell to $18.74. Shareholders have lost 5.1% of their capital, which is disappointing considering the S&P 500 has climbed by 13.4%. This was partly due to its softer quarterly results and may have investors wondering how to approach the situation.

Is there a buying opportunity in Norwegian Cruise Line, or does it present a risk to your portfolio? Dive into our full research report to see our analyst team’s opinion, it’s free for active Edge members.

Why Do We Think Norwegian Cruise Line Will Underperform?

Even though the stock has become cheaper, we're swiping left on Norwegian Cruise Line for now. Here are three reasons why NCLH doesn't excite us and a stock we'd rather own.

1. Inability to Grow Passenger Cruise Days Points to Weak Demand

Revenue growth can be broken down into changes in price and volume (for companies like Norwegian Cruise Line, 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.

Over the last two years, Norwegian Cruise Line failed to grow its passenger cruise days, which came in at 6.83 million in the latest quarter. This performance was underwhelming and implies there may be increasing competition or market saturation. It also suggests Norwegian Cruise Line might have to lower prices or invest in product improvements to accelerate growth, factors that can hinder near-term profitability.

2. Cash Burn Ignites Concerns

If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.

Over the last two years, Norwegian Cruise Line’s demanding reinvestments to stay relevant have drained its resources, putting it in a pinch and limiting its ability to return capital to investors. Its free cash flow margin averaged negative 3.9%, meaning it lit $3.89 of cash on fire for every $100 in revenue.

3. Short Cash Runway Exposes Shareholders to Potential Dilution

As long-term investors, the risk we care about most is the permanent loss of capital, which can happen when a company goes bankrupt or raises money from a disadvantaged position. This is separate from short-term stock price volatility, something we are much less bothered by.

Norwegian Cruise Line burned through $1.04 billion of cash over the last year, and its $14.52 billion of debt exceeds the $166.8 million of cash on its balance sheet. This is a deal breaker for us because indebted loss-making companies spell trouble.

Unless the Norwegian Cruise Line’s fundamentals change quickly, it might find itself in a position where it must raise capital from investors to continue operating. Whether that would be favorable is unclear because dilution is a headwind for shareholder returns.

We remain cautious of Norwegian Cruise Line until it generates consistent free cash flow or any of its announced financing plans materialize on its balance sheet.

Final Judgment

We cheer for all companies serving everyday consumers, but in the case of Norwegian Cruise Line, we’ll be cheering from the sidelines. Following the recent decline, the stock trades at 7.4× forward P/E (or $18.74 per share). While this valuation is optically cheap, the potential downside is huge given its shaky fundamentals. There are better stocks to buy right now. We’d recommend looking at one of Charlie Munger’s all-time favorite businesses.

Stocks We Would Buy Instead of Norwegian Cruise Line

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