Expanding Destinations And AI Pricing Strategies Will Improve Future Guest Experiences

Key Takeaways

• Expansion into private destinations and AI-driven pricing strategies may boost pricing power, revenue, and improve net margins.
  
• Investment in new ships and sustainable growth strategies could enhance guest experiences, increase revenue, and drive margin expansion.
  
• Heightened competition, cost pressures, and external factors such as politics and fuel prices may limit Royal Caribbean's market share and revenue growth.

Catalysts

Operates as a cruise company worldwide.

• The company plans to expand its private destinations portfolio with Perfect Day Mexico and a new hotel in Puerto Williams, Chile, which are expected to drive higher demand and pricing, likely increasing future revenues.
  
• Adoption of AI-enabled yield management tools and a nimble sourcing model to optimize pricing and yield growth indicates potential improvement in net margins.
  
• Investment in new ships, including the Utopia of the Seas and a fourth Icon class ship, is anticipated to enhance the guest experience and generate higher ticket prices and onboard revenue, contributing to future earnings growth.
  
• Significant future capacity additions with moderate yield growth are expected to drive top-line growth and margin expansion, contributing positively to EBITDA margins and net margins.
  
• A strong focus on sustainable growth, including a commitment to reducing carbon intensity and diversifying fuel sources, could lead to cost efficiencies and potentially improve net margins.

Royal Caribbean Cruises Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Royal Caribbean Cruises's revenue will grow by 9.3% annually over the next 3 years.
• Analysts assume that profit margins will increase from 16.2% today to 23.4% in 3 years time.
• Analysts expect earnings to reach $4.9 billion (and earnings per share of $18.08) by about December 2027, up from $2.6 billion today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 17.1x on those 2027 earnings, down from 25.0x today. This future PE is lower than the current PE for the US Hospitality industry at 23.6x.
• Analysts expect the number of shares outstanding to grow by 0.38% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.13%, as per the Simply Wall St company report.

Royal Caribbean Cruises Future Earnings Per Share Growth

Risks

• The increased competition in the vacation market and high bar for comparables due to previous yield growth could limit Royal Caribbean's ability to continuously capture market share and could pressure future revenue growth.
  
• The cost growth, particularly related to elevated drydock days and stock compensation, could pressure net margins if revenue growth does not outpace these cost increases.
  
• Political and environmental factors, such as hurricanes and potential election-related noise, could dampen consumer demand at crucial times, affecting booking trends and potentially impacting quarterly revenues.
  
• Ongoing investments in new destinations and infrastructure, while promising future returns, could create significant capital expenditures, diluting earnings if these ventures do not achieve expected financial returns.
  
• Fluctuations in fuel prices and stock compensation costs, if they rise beyond forecast levels, could negatively impact earnings due to higher operational costs that may not be easily offset by incremental revenue growth.

Valuation

• The analysts have a consensus price target of $245.25 for Royal Caribbean Cruises based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $310.0, and the most bearish reporting a price target of just $155.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $21.0 billion, earnings will come to $4.9 billion, and it would be trading on a PE ratio of 17.1x, assuming you use a discount rate of 8.1%.
• Given the current share price of $242.07, the analyst's price target of $245.25 is 1.3% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.