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The Carnival share price dropped another 14% last week. Could it be an undervalued gem?

A Saga cruise ship sits in port
Image: Saga

With global financial markets seeing higher volatility than normal, some stocks are seeing their share prices slump. One example at the moment is Carnival (LSE:CCL). The Carnival share price dropped 14% last week, to close at 1,203p on Friday. This made it one of the worst performers over this period. With the shares also down 18% over a year, how low does the stock need to go before it becomes an undervalued buy for me?

Omicron stunting demand

It’s unsurprising that the Carnival share price performed badly last week given the latest Covid-19 news. The new strain, Omicron, is worrying the WHO along with governments around the world. From the first identification in Africa, cases have now been seen globally, including here in the UK.

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The domino effect is that travel restrictions are being tightened up with more tests now needed to travel abroad. This is bad for Carnival, as a global cruise line operator. Not only will people find it more difficult to take a cruise at the moment, but some are unlikely to even want to book such a trip.

Negative sentiment means that Carnival could see lower demand even for bookings that could be placed well in advance. At the moment, we don’t know what the picture will look like next summer, so committing to a cruise in this environment is a tough ask. I also need to remember that the broad target audience for Carnival is middle-aged and older. This set of clients is likely to be more cautious than younger travellers.

Carnival shares could continue to struggle

A the moment, Carnival shares are trading just above their low of the past year, a level seen in February (again when the outlook was bleak). If they go below 1,000p, then then they’d be on track to move below the lows seen in 2020, which in turn were the lows of the past decade.

So it’s clear that at 1,200p, the Carnival share price is low when looking at historical prices. But this doesn’t mean that it’s undervalued. The latest Q3 results showed that occupancy on its cruises was increasing. This went from 39% in June to 59% in August.

Yet even with eight of the nine cruise brands offering some kind of service, it’s still too early to gauge demand properly. This is because “many cruises, while generating positive cash flow, were limited to scenic cruises without ports of call, and generally priced well below the attractive destination-rich cruises we normally offer,” the company said.

So what I see here is a business that’s uncertain of demand, posting a quarterly net loss of $2bn. This is before the variant news hit! So personally I think the Carnival share price accurately reflects the current position that the business is in and isn’t undervalued.

There could be rich rewards for investors that have a high risk-tolerance. If Omicron is an over-reaction, and if demand for cruises rises sharply, the shares should rally. For me, this probability is too small right now, so I won’t be investing.

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Jon Smith and The Motley Fool UK have no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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