Norwegian Cruise Line’s stock price has taken a beating over the past six months, shedding 21.3% of its value and falling to $19.33 per share. This was partly due to its softer quarterly results and might have investors contemplating their next move.
Is there a buying opportunity in Norwegian Cruise Line, or does it present a risk to your portfolio? Get the full stock story straight from our expert analysts, it’s free.
Why Do We Think Norwegian Cruise Line Will Underperform?
Even with the cheaper entry price, we're swiping left on Norwegian Cruise Line for now. Here are three reasons you should be careful with NCLH and a 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 6.37 million in the latest quarter, and over the last two years, averaged 2.3% 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
If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.
While Norwegian Cruise Line’s free cash flow broke even this quarter, the broader story hasn’t been so clean. 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 1.7%, meaning it lit $1.71 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 $1.17 billion of cash over the last year, and its $14.61 billion of debt exceeds the $209.9 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
Norwegian Cruise Line falls short of our quality standards. After the recent drawdown, the stock trades at 8.2× forward P/E (or $19.33 per share). While this valuation is optically cheap, the potential downside is huge given its shaky fundamentals. There are better stocks to buy right now. We’d suggest looking at the most dominant software business in the world.
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