This Cruise Stock is a Strong Buy, With 35% Upside, Says Goldman Sachs

Goldman Sachs is bullish on Norwegian Cruise Line Holdings, upgrading the stock from Neutral to Buy and raising the price target to $35 from $29, indicating potential upside of 34.8% from the previous close.

According to the analysis, there are several factors driving the positive outlook for the cruise industry and NCLH in particular. Firstly, the analyst expects a strong recovery in travel demand, particularly for cruises, with new-to-cruise passenger numbers projected to grow more than 10% annually. This surge in demand is anticipated to outpace the growth in supply, giving cruise companies increased pricing power.

The introduction of new ships and a favorable shift in fleet composition are also expected to enhance NCLH's pricing power through a halo effect. Additionally, the company is improving its revenue management strategies, reducing its reliance on discounting to fill ships and encouraging earlier onboard spending by passengers.

Furthermore, the bank sees an opportunity for significant balance sheet repair in the coming years for cruise line companies. This financial strengthening is anticipated to attract a wider range of investors and contribute to a higher valuation of the sector.

Norwegian Cruise Line shares have soared 51% YTD compared to the S&P 500's 27% rise. However, the stock's valuation is still well below pre-COVID levels, according to the analyst. We believe it is a better business today and warrants a higher multiple to begin to close the gap to RCL. 

While the analyst is generally bullish on the stock, they also acknowledge some risks, including the potential for large supply increases over a short period, which could erode NCLH's pricing power, and sustained increases in the price of bunker fuel, which could reduce the company's ability to improve margins and meet financial obligations.

Nonetheless, the majority of analysts covering the stock are bullish, with 12 out of 22 rating it as a Buy or Strong Buy. The average analyst price target implies upside of more than 11%.