Investors may suddenly feel confused about Carnival (CCL 4.91%) stock. Both Carnival and its largest competitors, Royal Caribbean and Norwegian Cruise Line Holdings, had previously stuck to bullish forecasts as bookings remained strong despite sluggishness in the market.

Unfortunately, the industry may have begun to show signs of rough waters. Royal Caribbean raised guidance in its most recent earnings report, while Norwegian reduced guidance on net yield growth, an indication of how much revenue it generated relative to its capacity.

Carnival does not report earnings until mid-June, so it could be several weeks before investors know whether the cruise line stock's performance more closely resembles that of Royal Caribbean or Norwegian. The question for investors is whether they can feel confident about buying Carnival stock despite that uncertainty.

Carnival's challenges

Indeed, the effects of the pandemic shutdown in 2020 and 2021 continue to weigh on the company's financials.

To make up for the revenue shortfall, it had to borrow tens of billions of dollars. Today, it still holds about $27 billion in total debt, a tremendous burden for a company with a book value of $9.2 billion.

That is crucial because servicing and paying down that debt has depended on the strength of its bookings.

It has also invested in added capacity. It plans to launch the Festivale in 2027 and the Tropicale in 2028. Assuming demand stays strong, those ships should add to the company's top and bottom lines.

Nonetheless, such investments are more difficult when a company is heavily in debt. If consumers stop taking cruises due to economic concerns, it will have to cut prices to attract consumers, squeezing the company's margins. That added capacity could also make the company more vulnerable if a meaningful downturn occurs.

Why Carnival might still continue to prosper

However, despite such potential challenges, Carnival's business has recovered from the pandemic.

And it is the industry leader. About 42% of all cruise passengers sail on a Carnival-owned ship, and the added capacity should solidify its leadership.

Amid that market lead, cabin availability has been scant in recent quarters. It booked 103% of its capacity (100% capacity is two people per cabin) in the first quarter of fiscal 2025 (ended Feb. 28). Also, the company says 2026 bookings are at record levels. This allows Carnival to command higher prices.

Not surprisingly, those bookings have boosted its financials. In the fiscal first quarter, revenue of $5.8 billion rose 7% yearly. That led to a $78 million quarterly loss. Still, its $1.9 billion profit in fiscal 2024 after losing money in the first quarter of that year likely means the loss is temporary.

About $1.5 billion of the $27 billion in total debt is due this year. Fortunately, the company paid off more than $3 billion of its debt in fiscal 2024 and another $500 million in the first quarter, implying that it can retire current debt without refinancing.

Lastly, investors must look at the stock itself. Although it is up by around 20% over the last year, it has fallen about 35% since late January. That takes its price-to-earnings ratio (P/E) to 12, the lowest level since returning to profitability last year. That likely means its challenges are already factored into the stock price.

Is Carnival sailing into rough waters?

For now, it is unclear whether the softness reported by Norwegian or the continued prosperity noted by Royal Caribbean better reflects the state of Carnival. Still, it looks like the stock is prepared to either weather economic challenges or benefit from the continued popularity of cruises.

The cruise line might have to slow its expansion if the economy forces it to cut prices to attract customers. Nonetheless, Carnival has shown that it can maintain its market lead, retire its massive debt, and expand its fleet amid strong demand. At just 12 times earnings, investors should consider either holding out or adding shares rather than selling because of economic conditions that are likely temporary.