When it comes to cruise-ship stocks, Royal Caribbean (RCL -1.90%) and Carnival Corporation (CCL -2.26%) (CUK -2.41%) are the two big dogs in the space. And when looking for a third main player, Norwegian Cruise Line (NCLH -2.24%) is the next one that comes to mind for most investors.
Since they were completely docked during the pandemic's height, it was a rough couple of years for cruise companies. But demand has roared back, and some businesses are even enjoying all-time highs for bookings.
Indeed, 2024 has turned out to be a fine year for cruising. But this doesn't necessarily mean that investors are doing well. Shares of Carnival and Norwegian are actually down year to date, leaving only Royal Caribbean to outperform the S&P 500.
However, there is another cruise stock that had its initial public offering (IPO) on May 1. Viking (VIK -2.72%) is a cruise company founded in 1997 which is focused on smaller ships for river cruises, and its shares are performing well.
Viking wasn't around for the entire first half of the year. However, since it went public in May, the shares are up over 30%, making it the top cruise stock so far in 2024. Here are some things that investors should know about the IPO stock.
How is Viking different from its peers?
For big cruise-ship companies, roughly two-thirds of their focus is on the Caribbean, according to data from Cruise Industry News cited by Viking. In contrast, Viking focuses on river cruises as well as destinations throughout Europe and the Mediterranean.
Viking also focuses on providing a premium experience for a small group of passengers, instead of trying to attract the masses with bargain pricing. Its river ships hold fewer than 200 people, and its ocean ships can hold fewer than 400 people. It also doesn't allow kids on board, focusing rather on those at least 55 years old. But it makes up for its smaller clientele by generating more than $7,000 per customer, on average.
Another differentiator for Viking is that its cruises are all-inclusive and don't offer alternative restaurants or casinos that cost extra. This is actually noteworthy. For Carnival, 65% of its revenue came from selling tickets in its fiscal 2023. The rest came from onboard purchases, which are relatively high-margin. Royal Caribbean's financial results were similar in 2023, with 69% of revenue coming from tickets and the rest coming from onboard spending.
It would seem that with its strategy, Viking is giving up on a lucrative revenue stream that its peers Carnival and Royal Caribbean enjoy. But the company isn't necessarily disadvantaged by its strategy. In 2023, Viking had operating income of over $800 million, which was an operating margin of 17% -- so addressing the higher end of the market can be lucrative.
Viking did have a loss in the first quarter of 2024. But investors should remember that there's seasonality in the cruise business, and business is best during the second and third quarters. Therefore, investors need to be careful when looking at Q1 financials in isolation.
Should investors buy Viking stock?
Viking has fewer than 100 ships today. But it has 18 new river boats scheduled for delivery before the end of 2026, and six new ocean ships before the end of 2028. This gives investors a fairly clear view of growth potential in coming years.
Essentially, Viking is increasing the size of its fleet by about one-third over the next four years. Assuming comparable occupancy levels through 2028, investors can expect a roughly similar increase to the company's revenue potential. In other words, investors might be looking at a high single-digit annual growth rate, which might not be enough to appeal to some.
Heavy debt loads are common for cruise companies because it's not cheap to buy boats. But Viking investors should also be aware that it has $3.9 billion in net debt (subtracting its cash from its debt), which is pretty high for a business with less than $7 billion in trailing 12-month revenue.
It's possible that Viking will offer investors modest growth. A substantial portion of profits could go to taking care of its debt obligations. For these reasons, the stock returns could be modest.
Then again, Viking's management says that the premium cruise space is growing faster than the overall industry. The company's new ships will allow it to capture this industry growth better than other players.
In the end, I believe there's uncertainty with a Viking investment today. On top of this, it's an IPO stock, and those are prone to more extreme volatility for the first year or two of trading. Therefore, it may be best to wait to buy Viking stock, patiently assessing the execution of the business and waiting for volatility to die down.
