Over the last six months, Norwegian Cruise Line’s shares have sunk to $19.31, producing a disappointing 7.8% loss - a stark contrast to the S&P 500’s 8.6% gain. This was partly driven by its softer quarterly results and may have investors wondering how to approach the situation.
Is now the time to buy Norwegian Cruise Line, or should you be careful about including it in your portfolio? Check out our in-depth research report to see what our analysts have to say, it’s free.
Why Do We Think Norwegian Cruise Line Will Underperform?
Even though the stock has become cheaper, we’re cautious about Norwegian Cruise Line. Here are three reasons why there are better opportunities than NCLH, plus one stock we’d rather own.
1. Weak Growth in Passenger Cruise Days Points to Soft Demand
Revenue growth can be broken down into changes in price and volume (for companies like Norwegian Cruise Line, our preferred volume metric is passenger cruise days). While both are important, the latter is the most critical to analyze because prices have a ceiling.
Norwegian Cruise Line’s passenger cruise days came in at 6.63 million in the latest quarter, and over the last two years, averaged 4.4% year-on-year growth. This performance was underwhelming and suggests it might have to lower prices or invest in product improvements to accelerate growth, factors that can hinder near-term profitability. 
2. Cash Burn Ignites Concerns
Free cash flow isn’t a prominently featured metric in company financials and earnings releases, but we think it’s telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.
Over the last two years, Norwegian Cruise Line’s demanding reinvestments to stay relevant have drained its resources, putting it in a pinch and limiting its ability to return capital to investors. Its free cash flow margin averaged negative 7.7%, meaning it lit $7.74 of cash on fire for every $100 in revenue.
3. Short Cash Runway Exposes Shareholders to Potential Dilution
As long-term investors, the risk we care about most is the permanent loss of capital, which can happen when a company goes bankrupt or raises money from a disadvantaged position. This is separate from short-term stock price volatility, something we are much less bothered by.
Norwegian Cruise Line burned through $949.1 million of cash over the last year, and its $15.15 billion of debt exceeds the $185 million of cash on its balance sheet. This is a deal breaker for us because indebted loss-making companies spell trouble.
Unless the Norwegian Cruise Line’s fundamentals change quickly, it might find itself in a position where it must raise capital from investors to continue operating. Whether that would be favorable is unclear because dilution is a headwind for shareholder returns.
We remain cautious of Norwegian Cruise Line until it generates consistent free cash flow or any of its announced financing plans materialize on its balance sheet.
Final Judgment
We see the value of companies helping consumers, but in the case of Norwegian Cruise Line, we’re out. Following the recent decline, the stock trades at 12.6× forward P/E (or $19.31 per share). While this valuation is fair, the upside isn’t great compared to the potential downside. There are better stocks to buy right now. Let us point you toward the Amazon and PayPal of Latin America.
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