Royal Caribbean (NYSE:RCL) stock is still suffering from the pandemic shock and for good reason. The pandemic was extremely disruptive to global commerce, especially the travel and leisure businesses. While we are at the tail end of it, the threat of outbreak headlines to some companies still lingers. Before the pandemic, Royal Caribbean was firing on all cylinders when its business died almost instantaneously. But just like its competitors, RCL didn’t contribute to its woes by making mistakes itself. The whole sector collapsed at once.
Although we have to give Royal Caribbean props for surviving the pandemic, it certainly won’t be smooth sailing from here. Too much of a good thing can sometimes be bad. In this case, the crash of 2020 was unavoidable. But the rally back in RCL stock that followed that year was illogical.
I understand liking a stock, but not blindly. It was clear early on that Royal Caribbean’s business would be in peril for a while. If investors had stopped after only a 265% return, not a 425%-plus return, then they would be around today’s price level.
Instead, RCL rallied too much and failed at a very contentious spot. Specifically, RCL stock traders have been fighting over the $100 mark since 2015. They failed at this level in the past, but have used it as support since 2018. Now it is a lid that the bulls will need a miracle to help pop open. I doubt that they can do this without a significant change in sales. This is a tall task, but Royal Caribbean is getting back on track.
RCL Stock Fundamentals Are in Shambles
The fundamentals are not simple because of continuing pandemic-related disruptions. Under normal circumstances, it’s easy to be bullish toward the business because people who cruise tend to continue being fans of the activity. RCL has been dealing with outbreak headlines for ages. But I’m assuming that outbreak news in the future will take a much different tone than before Covid-19. Moving forward, outbreak headlines could have abnormally negative repercussions on cruise stocks for a while.
The profit and loss metrics offer us little help, because they still reflect the closures. Total revenues are $1.5 billion; whereas, in 2019 they were almost $11 billion.
However, the more dangerous number is the $5 billion yearly net loss. It is hard to sustain this without a massive increase in sales to normalize metrics a bit. I worry that management will need to borrow to operate. Currently the cash flow from operations is still a loss of $1.9 billion. That’s a heavy burden. This limits what RCL can do in order to spruce up sales.
From a technical perspective, RCL stock has support below $67 per share. It has temporarily gone below that, but the buyers have saved it. But they have also been unwilling to sustain the rallies and they have failed to convincingly exceed $85. Now it has established a trading range that is likely to be here for a while.
Therefore, Royal Caribbean investors need to have a long-term horizon. There’s also no need to add to current positions until we learn more about the variables in play.
Bottom Line on Royal Caribbean
The economy is fine and it will survive the Federal Reserve rate hike cycle. With a bit of help from the indices, Royal Caribbean stock might even crack into three digits. But first RCL shares must struggle with the resistance around $90 per share. If it goes above $100 per share, the stock could overshoot another 20% from there.
While looking up is exciting, I also must be careful about the downside potential. Remember that the stock can fall through no fault of its own, just like it did in February 2020. The complete collapse did not happen because the stock didn’t look good. The threat was a surprise and completely independent of its own business developments. Therefore, investors need tone down their level of enthusiasm.
There are currently too many variables in limbo. As such, you should consider diversifying your risks. For example, it would be good to avoid RCL stock if long companies like Boeing (NYSE:BA) or American Airlines (NASDAQ:AAL). The three often move in unison, so it would be like tripling up on the downfall if things go south.
On the date of publication, Nicolas Chahine did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.