Carnival's Record 2025 Results Clash with DeepValue's Sell Thesis on Valuation and Leverage Risks

What happened

Carnival Corporation reported robust fiscal 2025 financial results, with record revenue and earnings, as highlighted in a recent Motley Fool article that paints an optimistic picture of durable industry growth and consumer value. However, DeepValue's master report critically notes that the stock trades at a rich ~15x P/E and ~16x EV/EBITDA, with a DCF-derived intrinsic value of ~$12.64, over 140% below the current ~$31 price. The company's balance sheet remains heavily leveraged, with net debt/EBITDA at 6.6x, amplifying vulnerability to occupancy declines, fuel price spikes, and rising environmental or regulatory costs. While the cruise industry benefits from strong demand and pricing, Carnival faces headwinds from aggressive capacity growth by peers and tightening emissions rules that could erode margins. Investors must look beyond the positive propaganda to recognize that current valuations assume sustained high performance and rapid deleveraging, which may not materialize in a cyclical or cost-pressured environment.

Implication

The stock's premium pricing means any demand softening or cost increases could trigger significant downside, given the high operational and financial leverage. Carnival's elevated net debt/EBITDA of 6.6x complicates deleveraging efforts, making it sensitive to interest rate changes and potential refinancing challenges. Environmental regulations, such as EU ETS expansion, are set to raise compliance costs over time, pressuring already thin margins in a capital-intensive business. Peer capacity growth outpacing Carnival's could lead to overcapacity, undermining pricing power and yield sustainability in the medium term. For current holders, this suggests a need to trim or underweight positions unless the company demonstrates faster debt reduction and resilience to these headwinds beyond current bullish assumptions.

Thesis delta

The optimistic news article does not shift the DeepValue sell thesis, as it fails to address the critical issues of overvaluation, high leverage, and industry risks that underpin the potential sell stance. Carnival's strong 2025 results are already reflected in the stock price, and without accelerated deleveraging or mitigation of environmental and competitive pressures, the investment case remains weak.