Emerging Middle Class And Digitalization Will Expand Cruise Demand

Key Takeaways

• Expansion in emerging markets and favorable demographic trends are driving sustained volume growth, higher occupancy, and improved revenues for Royal Caribbean.
  
• Digitalization, fleet modernization, and a consumer shift toward experiences are enhancing pricing power, margins, and long-term demand resilience.
  
• Heavy debt, environmental pressures, market concentration, overcapacity risks, and global uncertainties threaten profitability, flexibility, pricing power, and demand reliability.

Catalysts

Operates as a cruise company worldwide.

• The expanding global middle class, especially in emerging markets such as Asia and Latin America, is set to significantly increase the pool of potential cruise passengers. Royal Caribbean’s nimble and flexible sourcing model positions it to seize this opportunity, supporting higher load factors and sustained volume growth that directly translates into rising revenues over the long term.
  
• Demographics are increasingly in Royal Caribbean’s favor as aging populations in developed markets and the demand for multi-generational family vacations bolster vacation spending. With new and retrofitted ships designed to accommodate more families and higher occupancy, the company is positioned to improve both ticket revenue and onboard spending, enhancing overall earnings and margins.
  
• Investments in digitalization—such as the new customer-centric travel platform and the growing shift to direct bookings through applications and loyalty channels—are lowering customer acquisition costs and broadening reach. This increases Royal Caribbean’s pricing power, drives up passenger yield, and delivers improved net margins by reducing reliance on third-party distribution.
  
• Fleet modernization, including the launch of advanced Icon and Oasis Class ships and expansion of exclusive destination offerings, is driving premium pricing and strong demand. These initiatives are boosting average per diem rates and onboard spend, supporting durable yield growth and higher EBITDA margins well into the future.
  
• Post-pandemic shifts in consumer preference toward experiences over material goods, combined with enhanced health, hygiene, and value-centric propositions, are fueling a lasting surge in cruise demand. This behavioral trend underpins robust forward bookings and supports the company’s long-term adjusted earnings per share growth ambitions.

Royal Caribbean Cruises Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more optimistic perspective on Royal Caribbean Cruises compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts.
• The bullish analysts are assuming Royal Caribbean Cruises's revenue will grow by 9.6% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from 19.4% today to 28.4% in 3 years time.
• The bullish analysts expect earnings to reach $6.3 billion (and earnings per share of $22.79) by about May 2028, up from $3.2 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 21.1x on those 2028 earnings, up from 18.9x today. This future PE is lower than the current PE for the US Hospitality industry at 21.9x.
• Analysts expect the number of shares outstanding to grow by 5.52% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.22%, as per the Simply Wall St company report.

Royal Caribbean Cruises Future Earnings Per Share Growth

Risks

• Heightened global attention to climate change and carbon emissions may increase regulatory and cost pressures on Royal Caribbean, as the company continues to invest in new ships and fuel-intensive hardware, potentially reducing profitability and constraining long-term revenue growth.
  
• Royal Caribbean faces elevated financial risk due to its significant debt load, much of which was accumulated during the COVID-19 period, and ongoing heavy capital expenditure for new ships and private destinations; such high leverage can restrict financial flexibility, raise interest expenses, and pressure net margins and long-term earnings.
  
• The company relies heavily on North American and European source markets, which increases its vulnerability to economic downturns or demographic shifts in these regions, potentially leading to recurring volatility in revenues and earnings if consumer demand weakens or younger generations prioritize different leisure activities.
  
• Increased industry capacity, both from Royal Caribbean’s aggressive fleet expansion and competitor growth, may lead to oversupply, undermining pricing power and occupancy rates during periods of weaker demand, thereby compressing yields and impacting overall revenue per available berth.
  
• Long-term geopolitical risks and shifts in global health landscapes—including the potential for pandemics, travel restrictions, or regional instability—could disrupt international itineraries and consumer confidence in cruise travel, resulting in prolonged booking hesitancy and unpredictable revenue trends.

Valuation

• The assumed bullish price target for Royal Caribbean Cruises is $327.4, which represents two standard deviations above the consensus price target of $265.43. This valuation is based on what can be assumed as the expectations of Royal Caribbean Cruises's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $330.0, and the most bearish reporting a price target of just $200.0.
• In order for you to agree with the bullish analysts, you'd need to believe that by 2028, revenues will be $22.0 billion, earnings will come to $6.3 billion, and it would be trading on a PE ratio of 21.1x, assuming you use a discount rate of 8.2%.
• Given the current share price of $225.59, the bullish analyst price target of $327.4 is 31.1% higher.
• 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.