Could Buying Carnival Stock Today Set You Up for Life?

Carnival (NYSE: CCL) (NYSE: CUK) has been making a comeback. Since the start of 2023, shares have skyrocketed 115% (as of Oct. 1). That gain is well ahead of the S&P 500 index's rise over the same period.

But this top cruise line stock still has a lot of catching up to do. It currently trades 75% below its all-time high from January 2018. Does this mean buying Carnival shares today could potentially set you up for life? Here's what investors should know.

Carnival's strong momentum

Carnival recently reported its financial results for the fiscal 2024 third quarter (ended Aug. 31). The business beat Wall Street estimates on both the top and bottom lines in the three-month period, which is certainly an encouraging sign for shareholders.

Carnival raked in $7.9 billion in revenue during the period, which was up 15% year over year. This set a record for the business. The company also saw record customer deposits. And there was "robust bookings momentum" into 2025 on strong pricing.

Operating income of $2.2 billion was also a record. This propelled diluted earnings per share to soar 59% to total $1.26 in Q3.

The latest financial results continue a streak of strong financial results for this business, particularly after the COVID-19 pandemic. In 2020, the company was forced to halt its operations to help stop the spread of the virus. As you can imagine, this crushed the financial picture. Carnival's sales tanked 91% between fiscal 2019 and fiscal 2021. It had no choice but to secure funding in order to stay operational. But now, the business is clearly sailing smoothly.

Think about the big picture

When thinking about stocks that can set you up for life, perhaps the overarching goal is to try to own businesses that can put up tremendous returns over several years and even decades. With this mental framework, it's easy to be critical about Carnival.

In the past 10 years, the stock produced a total return of negative 54%. An investor's money would've basically been cut in half over what is an extended time horizon.

During the same period, the S&P 500 generated a total return of 251%. Clearly, Carnival's track record is disappointing. But now that the business is on better footing, is it worthy of investment consideration?

I still don't think so. Shares trade at a forward price-to-earnings ratio of just under 14. That might look enticing, but I believe that low valuation is totally warranted.

For starters, Carnival's financial situation leaves much to be desired. As of Aug. 31, the company still carried almost $29 billion in long-term debt on its balance sheet. To be fair, this balance has been coming down steadily. But it puts the business in a precarious situation with almost no margin for error.

The capital-intensive nature of Carnival's operations is also not a favorable trait. This is evidenced by the company's extremely low return on invested capital (ROIC). Historically, Carnival's ROIC has averaged a weak 6.2%. That's very discouraging when you realize that the average ROIC for the S&P 500 is 10%.

While industry momentum is notable right now, I'd argue that demand for cruise travel can be cyclical, even though it has been strong in recent times. Should economic conditions deteriorate for whatever reason, it's not hard to believe that the business will take a hit.

In my opinion, investors should steer clear of owning this stock. I don't believe it's a high-quality business. Therefore, I don't think it possesses the potential to produce market-beating returns over the long term. So, its stock is not likely to set you up for life.

Should you invest $1,000 in Carnival Corp. right now?

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Neil Patel and his clients have no position in any of the stocks mentioned. The Motley Fool recommends Carnival Corp. The Motley Fool has a disclosure policy.