Investing in cruises is a gamble: fmr. analyst

Jason Ader, former Wall Street leisure analyst and CEO of SpringOwl Asset Management & 26 Capital Acquisition Corp., joins Yahoo Finance to discuss the cruise industry recovery amid the pandemic.

Video Transcript

MYLES UDLAND: We've talked a lot on this program over the last several months about the reopening trade. Certainly sitting right at the center of that is the cruise industry. Just a little breaking news here in the last few minutes, Royal Caribbean announcing that it has extended its suspension of cruises until the end of June. We see some of these names under pressure. Of course, we talked about Carnival's results yesterday. Those were received positively by the market.

So let's talk more about the reopening trade and everything else going on in the markets. We're joined now by Jason Ader. He's the CEO of SpringOwl Asset Management. He's also a former Wall Street leisure analyst.

Jason, great to talk with you this morning. Let's talk a bit about the cruises. You were just mentioning, you're down there in Miami, you see the cruises coming in and out every day with no one on them. Obviously, the market has gotten excited Invest traders, I think, speculators love to play the cruises, the reopening, airlines. How do you see the fundamentals of this business, cruises specifically, kind of shaking out as we get into the reality of less attendance on cruises? And I think a lot of people may be worried about ending up on another Petri dish.

JASON ADER: Yeah. Well, the cruise industry has certainly been one of the areas hardest hit. From a business perspective, amazingly, if you look at the stock prices, enterprise value, the market cap plus debt, is just about all-time high. And so there is just incredible expectations for a very rapid and strong recovery.

There is a fair amount of pent-up demand. We see it in the bookings. People want to take cruises again. But it's at really discounted prices, and there's a lot of promotional activity. And so the challenge will be, how long does it take the industry to get back to 2019 levels of profitability? I think it's going to be quite some time.

But nonetheless, I know the cruise companies themselves are doing everything they can to try to keep their customers safe, not just with vaccines, but also surface cleaning and air filtration systems. There's been a very significant investment in both those areas.

JULIE HYMAN: Jason, it's Julie here. So as you said, these stocks have rallied quite a bit off the bottom, off the lows, pretty universally across the board here. Given what you're saying, given that the outlook here is still pretty uncertain, given that the enterprise value is at record highs, as you point out, like what's an appropriate entry price for these companies? It sounds like you don't think it's here.

JASON ADER: Yeah, hi, Julie, how are you? Yeah, I have to agree with you. I mean, there's just, like many things in the market right now, I mean, the cruise industry is discounting very, very positive expectations for the foreseeable future. There's a lot of risk to the downside. I mean, people, forgetting that not only will it take a long time to ramp back to profitability, but it costs more now to carry customers because there is more cleaning, there's extended distances, and that's not at all factored in the stock price.

In addition to that, the recent guidelines don't really allow for children, and until the children are vaccinated. And so there is a loss of family business. While it was not a big part of overall cruising, it was a rapidly growing area. And you could see that in the Carnival and Royal and, of course, Disney Family offerings.

So I think the stock prices reflect just about the best case scenario. And there's just a substantial amount of risk to the downside, should something go wrong.

BRIAN SOZZI: Jason, but it is likely that cruising is going to come back to some extent, maybe not gangbusters this year or maybe not even next year, but five years from now, which cruise stock is the best performing, in your view, and why?

JASON ADER: Well, I mean, there's sort of two things to look at. There's cruising coming back in terms of total number of customers and then profits coming back. And I think that demand, you can always drive demand if you discount prices and offer incentives. You could fill every cruise ship. You could fill every hotel. You could fill every casino, if it's all price discounted.

And I think the challenge for the cruise industries is a bigger one now. Business travel, like real business travel, meetings and conventions, has just gotten very easy to do on Zoom. So the markets like Florida, Las Vegas, New York, it's all discounted. And it's going to be discounted for a very long time. So the price competition versus the cruise industry may be the greatest it's ever been. And so while demand is likely to come back, pricing and margin, I just think is at risk for a very long time.

So from my perspective, this is a group that I would not be investing in. I would be avoiding. And I suspect that we've got 20% to 40% downside after this rush of euphoria post pandemic and people realize, wow, the cruise ships are filled but profits are just way down relative to expectations. And I just think the prudent approach is sell and wait and see for all three of the public companies.

MYLES UDLAND: So Jason, in addition to your work at SpringOwl, you've also got a SPAC, 26 Capitol Acquisition Corp. And I'm just curious from your vantage point, you know, what the market looks like in general right now. Where are there opportunities? Where are things overheated? What's exciting to you today? Because we sit here all day, Yahoo Finance, we look at the public markets. They're at an all-time high. We hear the same arguments about the same sectors. Where are you kind of looking to deploy capital today?

JASON ADER: [INAUDIBLE], I've been very excited about the online gaming industry for many years. I just do see that there's a great opportunity for states, for countries that are looking to cover budget shortfalls to expand out the mobile offerings for gaming. We've seen it across the sports betting industry. New York, within basically the last 48 hours, is moving forward with an online gaming initiative. So that's really been my focus. I think it's a rapidly growing area.

And as 4G moves to 5G and consumers have the ability to wager more quickly on sports and then move into an online casino, esports, live table games, it's probably one of the most exciting areas of the market. I would have to say that online gaming revenues in 2021 will be up 100% versus where they were last year. And that's in the US. That makes it one of the fastest growing areas in the US economy.

So I continue to spend a lot of time in that particular sector and think, from an investment perspective, there are great opportunities.