Why Are Cruise Liner Stocks Sinking?

This year, investors have shown a continued strong interest in cruise liner stocks. The majority of the price activity for this group, however, has been moving in a downward trend as of late. It is business as usual today: major operators Carnival (NYSE:CCL), Royal Carribean (NYSE:RCL), and Norwegian (NYSE:NCLH) are all down between 9 and 15 percent from previous levels.

It would appear that a memo from Morgan Stanley’s research department was the cause of these quite abrupt moves lower. In the paper, analyst Jamie Rollo presented a gloomy worst-case scenario for Carnival, which depicted a bear situation of CCL stock becoming worthless.

Now, in order for this kind of catastrophic bear market scenario to play out, a number of different things need to go wrong. A significant and ongoing drop in demand that forces the cruise line to seek more funding.

Carnival, like many other cruise companies, has been mired in a substantial amount of debt for many years. Because of the pandemic, the corporation had to increase its borrowing in order to maintain its fleet. Currently, a significant portion of CCL’s price can be attributed to investors’ wagers that strong demand may eventually result in profitable operations. Nevertheless, the load of debt has been a source of concern for analysts for some time.

Let’s get into the potential implications that the pessimistic remark on CCL stock may have for investors.

The wake-up call from the analyst sends cruise liner stocks tumbling.

Already in 2022, Carnival and its shareholders have been through a significant amount of suffering. The price of CCL stock has decreased by more than 55 percent so far this year (YTD). The drop is significantly more dramatic when measured against the levels that existed before the outbreak. As a consequence of this, there is a compelling argument that significant downside is already baked into cruise liner stocks.

At this moment, the market analysts are doing exactly what they should be doing: analyzing many doomsday scenarios. In point of fact, if a recession is on the horizon, there may be a great deal more for which we should be concerned. At the very least, it would appear that market analysts are thinking in this way.

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When monetary policy is tightened, the market in which businesses try to raise capital becomes much more challenging for them to navigate. Investors are likely to be less willing to give money to companies that cannot promise to create future profits, regardless of whether the money is in the form of equity or debt. This negative cycle may pick up speed if future profitability is less certain to achieve.

It is unknown what the future holds for Carnival and the other cruise liner stocks at this point. It is very evident that investors are approaching the market with a great deal more caution than they once did.