Smooth Sailing: Analyst Touts Royal Caribbean as Top Cruise Line Stock Pick

Smooth Sailing: Analyst Touts Royal Caribbean as Top Cruise Line Stock Pick - Strong Bookings Support Bullish Outlook

Royal Caribbean's strong bookings are supporting analysts' bullish outlook on the cruise line's prospects in 2023 and beyond. The company reported that bookings for the first half of 2023 are ahead of 2019 levels, even after accounting for future cruise credits. This indicates robust underlying demand even without credits on passengers' accounts, highlighting the cruise line's popularity among travelers.

In addition, bookings made in the third quarter for 2023 sailings were significantly higher than bookings made in the third quarter of 2019 for 2020 sailings. This shows that consumers are booking further in advance now, giving Royal Caribbean excellent visibility into future revenue. The cruise line is seeing particularly high demand for European itineraries, which carry a revenue premium versus Caribbean sailings.

Pricing on bookings is also averaging considerably higher for 2023 compared to bookings made in 2019 for 2020. Royal Caribbean has made strategic decisions to optimize vessel deployment and focus more on premium priced itineraries and high-end segments. This is driving higher overall ticket prices and supporting revenue growth even if occupancy rates stay steady.

Onboard spend is another area that analysts are watching closely. Early indications suggest guests are splurging on high-margin activities like spa treatments, shore excursions, specialty dining, and beverage packages. With the cruise line's tech investments, it can now pre-sell these offerings earlier in the booking funnel. This helps lock in that lucrative onboard revenue.

Smooth Sailing: Analyst Touts Royal Caribbean as Top Cruise Line Stock Pick - Higher Onboard Revenue Helps Bottom Line

Royal Caribbean's focus on driving higher onboard revenue is paying dividends, helping strengthen the cruise line's bottom line. While ticket sales still make up the bulk of revenue, onboard spending has become an increasingly critical profit driver. This encompasses everything from specialty restaurants, alcohol sales, shore excursions, WiFi packages, photos, retail purchases, spa treatments, and more.

Analysts estimate onboard revenue can account for 30-40% of total revenue for Royal Caribbean. During the pandemic, there was concern travelers might pull back on splurging, given economic uncertainty. However, Royal Caribbean is seeing the opposite effect. Pent-up demand for travel is making cruisers eager to indulge. They want to maximize their long-awaited cruise experience.

Royal Caribbean's tech investments facilitate this spending. The cruise line now has detailed customer profiles, allowing ultra-targeted marketing of onboard offerings. Travelers receive personalized recommendations via the app for shore excursions, restaurants, and activities matching their interests. Pre-cruise, Royal Caribbean uses online shopping carts to pre-sell dining packages, beverage plans, WiFi, and excursions. This revenue is banked before guests even step on board.

On the ships themselves, Royal Caribbean leverages technology to make purchases frictionless. Wristbands and apps replace cash and cards. Everything is charged to guests' onboard accounts. The cruise line is even testing facial recognition for automated payments. Tech removes barriers to spur impulse purchases in bars, shops, and elsewhere around the ship.

During early 2023 sailings, Royal Caribbean is seeing onboard spending 20-30% above 2019 levels. Guests are indulging in specialty restaurants like Jamie's Italian or Izumi. They're buying premium beverage packages to enjoy unlimited drinks. Families are splashing out on experiences like flowriding, skydiving simulators, and escape rooms.

Shore excursions are another key onboard revenue stream. Royal Caribbean cruises offers a plethora of immersive tours and activities for guests to purchase in every port of call. Travelers want to make the most of limited time on shore. Unique experiences like swimming with dolphins or ziplining through rainforests are proving extremely popular.

Smooth Sailing: Analyst Touts Royal Caribbean as Top Cruise Line Stock Pick - Investments in Tech and Sustainability Pay Off

On the tech side, Royal Caribbean has leveraged big data and artificial intelligence to get more personalized with customer interactions. Detailed profiles based on past trips and purchasing behavior allow ultra-targeted marketing. Travelers receive suggestions for shore excursions, restaurants, spa treatments, and more that perfectly match their interests and budget. Pre-cruise, an online shopping cart enables guests to pre-book and pre-pay for a variety of onboard products and services. This locks in revenue before the ship even sets sail.

Once on board, the tech makes spending frictionless. Wristbands and apps replace cash and cards, with everything charged to an onboard account. Facial recognition is even being tested for seamless automated payments. These innovations remove barriers to boost impulse purchases in shops, bars, spas, and other venues throughout the ship.

The cruise line's OceanView app provides a personalized schedule, maps/directions, and mobile check-in. There is also a virtual concierge for booking dining and activities on demand. OceanView facilitates a smoother, more personalized trip.

On the sustainability front, Royal Caribbean aims to take the lead on eco-friendly cruising. It has committed to net carbon neutral cruising by 2050 through investments in energy efficiency, alternative fuels, and new emissions reduction technologies. The cruise line is also working closely with destinations to protect ecosystems and support local communities.

Newer ships like Wonder of the Seas and Celebrity Beyond boast cutting-edge designs to reduce environmental impact. This includes waste heat recovery systems and optimized hulls and propulsion. LED lighting, solar panels, and shore power connections further improve efficiency.

Smooth Sailing: Analyst Touts Royal Caribbean as Top Cruise Line Stock Pick - More Ships Coming Online in Next Few Years

Royal Caribbean has one of the most ambitious newbuild programs in the cruise industry. Over the next few years, the cruise line is scheduled to take delivery of seven next-generation ships. This will expand capacity by over 25,000 berths and introduce innovative new features to delight guests.

2023 and 2024 are particularly active years for Royal Caribbean's new ship pipeline. In 2023 alone, the cruise line will launch three highly anticipated new vessels. Up first is Icon of the Seas, the first ship in Royal Caribbean's new Icon Class. Debuting in January 2023, she will be the largest cruise ship in the world at over 250,000 gross tons. Icon will have eight distinct neighborhoods for endless entertainment, including a swim-up bar cantilevered high above the ocean. There will also be a brand new category of Ultrawide balcony cabins with glass walls offering unobstructed 270-degree views.

Following quickly on Icon's heels, Royal Caribbean will launch its second Excellence Class ship in May 2023. As yet unnamed, she will be a sister to Wonder of the Seas, combining thrills like the tallest slide at sea with relaxed solarium retreats. The cruise line is keeping details tightly under wraps to build anticipation.

In fall 2023, Royal Caribbean will take delivery of Celebrity Ascent. She will be the newest vessel for the cruise line's premium Celebrity Cruises brand. The ship will feature stunning accommodations inspired by mega-yachts. There are also innovative resort deck spaces like a cantilevered pool bar and suspension bridge.

The momentum continues into 2024 when two more Royal Class ships join the fleet. Debuting in spring 2024, the first vessel will be the fifth-largest cruise ship in the world. She will sail European itineraries showcasing Royal Caribbean's best-loved features. The second 2024 delivery will be the sister ship for 2021's Odyssey of the Seas. She will have a resort-style pool deck, skydiving simulator, and cutting-edge entertainment like laser tag.

Smooth Sailing: Analyst Touts Royal Caribbean as Top Cruise Line Stock Pick - Well-Positioned for Cruise Industry Rebound

Royal Caribbean finds itself well-positioned to capitalize as the cruise industry rebounds out of the pandemic. While COVID-19 battered the entire cruise space, Royal Caribbean's strong balance sheet allowed it to weather the storm without diluting shareholders. The cruise line raised over $12 billion in new capital since early 2020. This funded operating losses and new ship construction through the shutdown.

Now demand is surging back as travelers make up for lost time. In the third quarter of 2022, Royal Caribbean saw occupancy rates back near 2019 levels. Ticket prices are up nicely as cruisers opt for more premium staterooms and exotic itineraries. Onboard revenue is actually exceeding pre-pandemic levels as guests indulge in specialty dining, shore excursions, spa treatments, and more. Momentum is steadily building.

Importantly, Royal Caribbean did not overdiscount during the pandemic to fill ships. Competitors like Carnival were more aggressive with promotions, conditioning consumers to expect rock-bottom pricing. By contrast, Royal Caribbean held pricing integrity. It focused on protecting loyalty among its high-value customer base rather than market share at any cost. This strategy will enable better yield management during the rebound.

Royal Caribbean is also leveraging its unmatched global portfolio of brands across price points. The Royal Caribbean International flagship targets families with wow-factor ships offering broad entertainment. Sister luxury brand Celebrity Cruises provides an upscale, more refined experience. Ultra-luxury Silversea Cruises caters to the highest-end market with spacious suites and exotic expedition itineraries. This multi-brand structure allows Royal Caribbean to optimize deployment strategies and capture demand across the pricing spectrum.

The cruise line's heavy investment in technology pre-pandemic now gives it a real edge. Revenue management was honed using artificial intelligence and predictive analytics. Marketing is highly personalized leveraging in-depth customer insights. Onboard payments got frictionless with wristbands and mobile apps. Royal Caribbean created a digital ecosystem that drives greater customer satisfaction and higher onboard spending.

Critically, Royal Caribbean also invested in sustainability. It adopted ambitious carbon reduction targets and showcases eco-friendly features on new hardware like Icon of the Seas. Consumers increasingly demand this commitment to environmental stewardship - especially millennials and Gen Z cruisers. Royal Caribbean's green credibility positions it well for the future.

Smooth Sailing: Analyst Touts Royal Caribbean as Top Cruise Line Stock Pick - Valuation Still Attractive Despite Recent Gains

Royal Caribbean's stock has staged an impressive rebound over the past year, more than doubling from pandemic lows. However, analysts believe valuation remains attractive given the cruise line's fundamentals and long-term growth trajectory.

At current levels, Royal Caribbean trades at an EV/EBITDA multiple of 8.6x based on 2024 estimates. This represents a discount to the cruise line's 10-year average multiple of 9.8x. While pandemic-related volatility has expanded Royal Caribbean's trading range, multiples could expand into the low teens as operations normalize.

Upside potential is supported by Royal Caribbean's industry-leading net yield growth. The company is focused on optimizing itineraries and vessel deployments to target high-value segments. Onboard revenue initiatives, strategic brand positioning, and loyalty program expansion provide further tailwinds. These drivers underpin Royal Caribbean's potential to steadily expand EBITDA margins back toward 30% as the recovery progresses.

Bolstering the bull case, Royal Caribbean boasts a sterling balance sheet and liquidity position. The cruise line has pre-funded its newbuild program, avoiding dilution risk. It also has manageable near-term maturities after opportunistically extending debt tenors during the downturn. Royal Caribbean's balance sheet strength lowers enterprise risk, supporting a higher valuation multiple.

Some investors point to downside risk from higher interest expense weighing on Royal Caribbean's bottom line recovery. However, analysts expect offsetting tailwinds from higher onboard revenue, pricing growth, and new hardware delivering outsized returns. Royal Caribbean also has levers to pull in terms of optimizing deployment between its brands to maximize yield.

Over the long term, Royal Caribbean exhibits superior growth characteristics that justify premium multiples. The company is investing aggressively in digitalization and customer experience enhancements to drive revenue. Royal Caribbean's best-in-class load factors and repeat guest percentages underscore outstanding demand trends. The cruise line's capacity growth also leads the industry by a wide margin.

Between its orderbook and options, Royal Caribbean can strategically scale capacity to match rebounding demand. Past experience illustrates the cruise line's prowess at absorbing new supply while still driving yield growth. Royal Caribbean has historically generated ROIC above 10% on new ships - a testament to management's capital allocation expertise.

Smooth Sailing: Analyst Touts Royal Caribbean as Top Cruise Line Stock Pick - Long-Term Growth Story Intact After Pandemic

While COVID-19 severely disrupted the cruise industry, Royal Caribbean has emerged with its long-term growth story intact. In fact, pent-up travel demand is setting the stage for a multi-year cruising rebound. Royal Caribbean is poised to capitalize with its unmatched scale, innovative new hardware, and revenue-driving tech investments.

Throughout the pandemic, Royal Caribbean's bookings stayed robust, underscoring cruisers' loyalty and desire to get back onboard. Travelers have fond memories of relaxing poolside with a cocktail in hand or indulging in filet mignon and lobster tails in the dining room. They crave the entertainment, from Broadway-caliber shows to FlowRider surf simulators. Now, as health protocols ease, Royal Caribbean is seeing occupancy rates steadily recover back toward historical levels.

Importantly, the cruise line invested billions of dollars in new ships during the pause in operations. These next-generation vessels will allow Royal Caribbean to capture rebounding demand with state-of-the-art amenities. Take Icon of the Seas debuting in 2023 - she will be the world's largest cruise ship packed with eight unique neighborhoods of experiences. Her array of restaurants, bars, pools, shows, and activities sets a new benchmark for thrills. Bringing these innovative megaships online right as cruising ramps back up is a boon for Royal Caribbean.

Just as critical, Royal Caribbean leveraged the downtime to enhance its digital capabilities. Revenue management systems were refined using predictive analytics and AI. Customer insights were enriched, powering more personalized service and marketing. Frictionless technologies like wristbands and mobile apps were rolled out to boost onboard spending. This digital transformation allows Royal Caribbean to optimize pricing, drive higher yields, and enhance the experience throughout the customer lifecycle.

Critically, Royal Caribbean also invested heavily in sustainability during the lull. It adopted ambitious carbon reduction targets that appeal to eco-conscious millennials and Gen Z cruisers. New hardware like Icon of the Seas incorporates waste heat recovery, optimized hull designs, solar panels, and other efficiency innovations. These green credentials will be key competitive differentiators going forward.

Smooth Sailing: Analyst Touts Royal Caribbean as Top Cruise Line Stock Pick - Competitive Advantages Versus Peers

Royal Caribbean boasts key structural advantages that set it apart from rivals like Carnival and Norwegian Cruise Line. The company's larger scale provides benefits of fleet diversity, marketing muscle, and purchasing power. Royal Caribbean also made smart counter-cyclical investments in technology and sustainability that position it well for the rebound.

As the second-largest cruise operator, Royal Caribbean operates a balanced portfolio spanning mass market and ultra-luxury brands. This diversification proved invaluable during COVID-19, allowing redeployment between price points as demand recovered. Having distinct brands also enhances loyalty – guests feel affinity for Celebrity's upscale sophistication or Silversea's all-inclusive luxury. Meanwhile, properties like CocoCay and Perfect Day give Royal Caribbean's namesake brand its own personality.

Marketing represent another edge. As LeBron James' endorsement shows, Royal Caribbean thinks big. Its TV ads reach millions, building broad brand awareness and buzz for the latest megaships. Smaller players lack this advertising firepower. Royal Caribbean also captures valuable customer insights from its 45 million-plus Crown & Anchor Society members. This fuels personalization and drives higher onboard revenue.

Royal Caribbean's scale also confers key cost advantages. The company's purchasing power earns volume discounts on everything from food and fuel to linens and lifeboats. Bulking up orders of the new Icon Class enables efficient construction. These cost savings flow straight to the bottom line.

During the pandemic, Royal Caribbean invested counter-cyclically in technology and sustainability. The company transformed into a digital-first organization, leveraging AI and analytics to optimize marketing and revenue management. Frictionless wristbands and apps now enable higher onboard revenue. These tech capabilities widen Royal Caribbean's competitive moat.

The cruise line also established ambitious sustainability targets, key in attracting eco-minded younger cruisers. Smaller players may lack resources to fund this green transition. First-mover advantage here gives Royal Caribbean genuine credibility.