Royal Caribbean Stock Revisited: From Undervalued to Overheated?

$Royal Caribbean Cruises(RCL)$

Alright, so I recorded a article on Royal Caribbean Cruise Line back on April 10th, 2025. At the time, the stock was trading around $190 per share, and I rated it as a buy. It was one of those setups where there was a clear catalyst—an opportunity I highlighted, primarily around the company’s effort to reduce its long-term debt, lower interest expenses, and increase profitability.

Since then, Royal Caribbean’s stock has rallied, jumping from $190 to about $233 per share as of this recording. So, if you acted on that recommendation and made some money—congratulations! I'm always glad when my analysis helps generate profits for viewers.

In this article, I’m going to revisit Royal Caribbean, assess the long-term risks, update my proprietary discounted cash flow valuation, and ultimately let you know whether I still consider the stock a buy at these higher levels.

But with that strong rally, it’s time to re-evaluate. In this article, I’ll:

• Review key risks facing the business

• Update my discounted cash flow (DCF) valuation

• Reassess whether RCL remains a buy at current levels

Royal Caribbean Q1 2025 Earnings Overview

Q1 2025 Financial Highlights

• Net Income: $730 million, up from $360 million in Q1 2024

• Adjusted EPS: $2.71, above expectations

• Revenue: $4.0 billion, up 7.3% year-over-year

• Adjusted EBITDA: $1.4 billion

• Load Factor: 109%, reflecting robust demand

Royal Caribbean delivered a strong quarter fueled by higher ticket pricing, elevated onboard spending, and reduced costs—including lower interest and fuel expenses.

Updated Full-Year 2025 Outlook

• Adjusted EPS Guidance: Raised to $14.55–$15.55

• Net Yields: Expected to increase 2.5% to 4.5%

• Net Cruise Costs (ex. fuel): Anticipated to rise 0.1% to 1.1%

The improved outlook is supported by strong forward bookings, cost control, and positive consumer trends—particularly among younger travelers.

Operational Metrics

• Guest Capacity: 2.2 million, a 9% increase year-over-year

• Gross Margin Yields: Up 13.9%

• Net Yields: Up 4.7% (5.6% in constant currency)

• Gross Cruise Costs per APCD: Down 1.1%

• Net Cruise Costs per APCD (ex. fuel): Down 0.3%

The company continues to benefit from efficient operations and favorable pricing dynamics.

Management Highlights

Royal Caribbean’s management emphasized the strength of consumer demand, noting that travelers continue to prioritize experiences and perceive cruising as a high-value vacation option. Onboard spending and forward bookings remain strong despite broader economic uncertainties.

Key Risks to Watch

Despite the recent price action, investors should remain mindful of the underlying risks still facing Royal Caribbean.

Health & Safety Risks

Cruise ships have long been vulnerable to disease outbreaks—and this didn’t end with COVID. In 2024 alone, the CDC tracked 15 outbreaks on cruise ships, including norovirus and Salmonella—some on Royal Caribbean vessels. The confined nature of ships means illnesses can spread faster compared to other travel options.

Macroeconomic and Geopolitical Headwinds

Royal Caribbean has cited macro and geopolitical uncertainty as a material risk. In today’s environment—with ongoing global tensions and renewed U.S. tariffs under President Donald Trump—travel demand is showing early signs of softening. Companies like Airbnb and Booking Holdings have already reported weakening booking trends.

Should discretionary spending slow further, cruise lines could see pressure on both occupancy and pricing.

High Debt Burden

The company is still working through $20+ billion in debt, most of it taken on during the pandemic at high interest rates. While Royal Caribbean is generating strong free cash flow today, that leverage introduces downside risk in the event of a demand slowdown or pricing pressure.

Operational & Supply Chain Disruptions

Like many global operators, Royal Caribbean faces challenges sourcing crew and supplies in some markets. Delays in ship maintenance or construction can impact capacity, while the full effect of new tariffs on input costs and operations remains uncertain.

2. Updated Valuation: From Undervalued to Overpriced

Using my proprietary discounted cash flow model, I estimate Royal Caribbean’s intrinsic value per share at $128—well below its current market price of $250.

Even with a 10% margin of safety applied, the stock appears overvalued today. This valuation incorporates optimistic assumptions around long-term free cash flow, yet the market has priced in significant upside already.

Forward Price-to-Earnings Expansion

When I initially recommended RCL in April, it was trading at a forward P/E ratio of around 11–12x, based on data from Finchat.io. Today, that ratio has increased to approximately 15x, suggesting valuation expansion has occurred faster than fundamental improvements.

3. Updated Rating: Downgraded to Borderline Buy

Given the stock’s recent run-up, I’m revising my rating from a Buy to a Borderline Buy as of May 9th, 2025. In my framework, this means the stock sits between a Buy and a Hold—but is still tilted slightly toward the bullish side.

Why not a full Hold?

Because Royal Caribbean still has strong long-term fundamentals, including:

• Annual free cash flow of $2–6 billion

• A multi-year plan to pay down high-cost debt

• A virtuous cycle where reduced interest expense leads to stronger cash generation and further deleveraging

Even if the company used 100% of free cash flow to pay down its debt, it would take at least 5–6 years to fully retire it. While management likely won’t eliminate all debt—strategic leverage helps optimize cost of capital—they will likely target the most expensive debt first.

Conclusion

Royal Caribbean remains a high-quality business with improving financials, but the stock price has moved ahead of fundamentals. The long-term story is still intact, but for new investors, this is no longer the attractive entry point it was in April.

If you already own shares, this might be a time to hold or trim. If you’re looking to enter, waiting for a pullback would offer a better margin of safety.

Disclaimer: I want to make it clear that I am not a financial advisor, and nothing I say is intended to be a recommendation to buy or sell any financial instrument. Additionally, it's important to remember that there are no guarantees or certainties in trading or investing, and you should never invest money that you can't afford to lose.

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