By Teresa Rivas

Math is hard, as Barbie once said, and investors are struggling to make it work for Royal Caribbean Group, which announced that it would expand into river cruises. They needn't worry.

Royal Caribbean could have kept it simple. The cruise line operator delivered a better-than-expected fourth-quarter report and roughly in-line guidance, and its stock gained 12% following the results. It made bigger waves, however, by revealing it will enter the river cruise market -- a high-yielding segment, currently dominated by Viking Holdings, that skews toward wealthier consumers. Management expects the first two of 10 river ships to be delivered in 2027, and it will begin taking bookings for these maiden voyages next year.

At this point investors might be feeling skeptical of the stock. Royal shares have already surged 17% in 2025, and they have gained more than Nvidia over the past 12 months. At 17.8 times forward earnings, Royal is also pricier than Carnival and Norwegian Cruise Line Holdings, its two big competitors.

At first blush, the numbers don't look ideal. When Royal Caribbean suggested the river ships' cost per berth -- how much they will cost per cabin -- would be above the $340,000 to $355,000 it's spent on recent ocean ships, UBS analyst Robin Farley thought she had "misheard" management. Viking's ships, after all, cost only $214,000 per berth. "Even if we were to assume that Royal would get Viking's luxury pricing on Day One...it doesn't seem to us like it would be additive to earnings per share until sometime after 2029," she explained.

And the ships come with their own financial risks. Gimme Credit's Kim Noland noted that the 10 ships will cost about $5 billion in the coming years, meaning they are "expensive and not without risk and could delay a near term further upgrade in RCL's credit profile."

That's a lot of money for a project that -- given size restrictions -- will ultimately carry only a tiny fraction of the company's oceangoing passengers. Stifel's Steven Wieczynski admits he was "somewhat skeptical when we first examined the announcement."

Despite the apprehension, the news does look good for Royal. River cruising is a fragmented market -- ripe for a big player to claim share -- and has been growing at a double-digit clip a year for a decade. It should also be able to deliver margins and a return on capital that is at least as good as its oceangoing ships, according to William Blair analyst Sharon Zackfia. "[Royal can extend its premium] Celebrity brand to meet its customers where they want to be...[while keeping] customers inside its ecosystem," she writes.

Nor will river cruises cannibalize Royal's ocean business. Half of the company's passengers have already tried or want to try a river cruise, with most seeing it as an additional vacation rather than alternative to a planned ocean cruise. Smaller ships are also quicker to build, meaning the company could scale up rapidly.

Even Gimme Credit's Noland notes that given Royal's improving cash flow, leverage will likely remain stable despite the increased spending. And UBS' Farley suggests that, despite the cost, "getting into the river business does add greater visibility to Royal's long-term growth profile."

Worried investors should take comfort in Royal's fourth-quarter results, which showed that the company continues to do what it does best -- be one of the most reliable, strongest cruise operators, one that continues to capitalize on strong demand. If any large cruise operator has the ability to navigate the shallow river waters, it's Royal.

Ultimately, the math could hold water.

Write to Teresa Rivas at teresa.rivas@barrons.com

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(END) Dow Jones Newswires

January 31, 2025 21:30 ET (02:30 GMT)

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