As Royal Caribbean returns to the seas, its financial condition has dramatically improved. Cruise stock is poised to turn profitable soon as it can fulfill pent-up travel demand.

Despite the post-pandemic state of Royal Caribbean, the stock has returned to near pandemic lows. How should I react to this swoon? Should I buy the cruise line stock or stay away?

Why should I sail in?

It deserves the praise that Royal Caribbean survived the COVID-19 pandemic for more than a year without being permitted to sail. The industry is now on its way back to the seas more than a year after receiving government permission. Based on Cruise Market Watch’s report, Royal Caribbean holds a 21% market share, second only to Carnival.

Additionally, the company reported nearly $1.1 billion in revenue in the first quarter of 2021. Despite its net loss of about $1.2 billion, the company claims almost $2 billion in cash. Although that may seem like insufficient liquidity, analysts predict that the company will return to profitability in Q3, indicating that it has enough cash to weather the storm.

Despite the stock’s drop, it is closing in on its March 2020 low of $36 per share. In addition, Royal Caribbean is now able to sail, which makes it appear more appealing than it was when the stock traded at this level last year.

A price-to-sales ratio of 3.5 slightly exceeds historical levels. Although revenue is expected to grow by 479% this year and 43% in 2023, that sales multiple should fall over time.

All aboard!

Considering Royal Caribbean’s financial situation, it is unlikely that the stock will outperform the indexes. In fact, Royal Caribbean appears to be on the verge of returning to profitability.

However, the level of debt required to survive the pandemic has put tremendous strain on the balance sheet. As a result, most of the profit will likely be diverted to debt service rather than reinvested to grow earnings over time. Consequently, the stock has fewer catalysts for growth.