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Carnival (NYSE: CCL)(NYSE: CUK) is the leading global-cruise operator, and after it got crushed early in the pandemic, it's back in action. Investors who took a gamble on its recovery have been richly rewarded, but it's not out of the woods yet. Let's see why, where it might be one year from now, and whether or not it's still a gamble.

Demand: High

Carnival is enjoying skyrocketing demand that's still a rebound from pandemic closures. How long can this go on? So far, it's continuing, and Carnival has a favorable booked position already into 2025, with record booking volumes. So far, it's outpacing 2024 bookings in both price and occupancy levels.

Demand is likely to go down at some point. But even though Carnival wasn't pandemic-resistant, it's proving to be quite inflation-resistant. It's a rare company that isn't just managing through inflation but thriving. Part of that is still the backlash toward previous closures, but it seems to be more than that. People have saved up for what can be once-in-a-lifetime cruises, which are very often at the top of a bucket list.

If inflation stays elevated, even the desire to check off a bucket-list item might not be enough to keep demand high. But next year at this time, inflation levels may have moderated to a more reasonable rate, which could generate further interest and demand.

Profits: Improving

Carnival posted its first quarterly-net profit since the pandemic last year, although it reported a full-year net loss. It reported another net profit in the 2024 fiscal second quarter (ended May 31). That's slow and steady progress, and it's on track to deliver a full-year profit this year. Analysts expect earnings per share (EPS) of $1.17 for the 2024 full year and $1.53 for 2025.

In the meantime, other profitability metrics continue to improve as well. Operating income was $560 million, 400% more than last year, and adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) increased 75% to $1.2 billion.

Process: Upgraded

Part of management's strategy to keep generating higher demand is investing in its business and creating an unmatched customer experience. It recently rolled out Starlink connections throughout its fleet to boost connectivity while at sea, and it's hiring celebrity performers like Andrea Bocelli for significant events. It has made several general upgrades to cuisine and touring programs as well. This creates the kind of experience that keeps cruises at the top of bucket lists and keeps regular travelers coming back.

Cash: Plentiful

With the rebound in Carnival's business, it's now in an advantageous cash position. Cash from operations and free cash flow have been improving, with $2 billion in cash from operations in the second quarter and $1.3 billion in adjusted free cash flow. It ended the quarter with $1.6 billion in cash and equivalents. With record customer deposits of $8.3 billion and a strong demand cycle, it should be able to keep generating strong cash flow.

This is particularly important because of Carnival's high debt.

Debt: Lower

Carnival issued a high load of debt to stay open without any revenue coming in. Although it was only out of operation for a few months, a cruise fleet is expensive to maintain. It's now saddled with about $30 billion in debt, even though that's several billion dollars off its peak.

The cash component is helping it pay off its highest-interest debt while sustaining general operations and improvements. The danger is that demand dries up faster than debt is paid off. In a year from now, the debt should be substantially lower but still higher than prepandemic, and demand should still be strong enough so it's not in any actual danger.

Stock: That's the big question

Carnival stock is already at a level that prices in much of its recovery. Although it trades at a dirt-cheap price-to-sales (P/S) ratio of less than 1, it can't go up much more than that when its debt levels are so high and there aren't reliable earnings.

But as it makes progress all around, the price can go up while keeping the valuation where it is. And if it makes enough progress, it can even carry a higher valuation.

The average Wall Street price target for Carnival stock is 26% higher than today, with a high of 55% more over the next 12 to 18 months. Carnival is making good progress, and it should eventually go back to being a market-beating stock and paying its suspended dividend. If you can handle some volatility over the short term, Carnival could be a great stock to buy now at a bargain price.

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Jennifer Saibil has no position in any of the stocks mentioned. The Motley Fool recommends Carnival Corp. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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