Southwest Airlines Co. (LUV): A Bear Case Theory

We came across a bearish thesis on Southwest Airlines Co. (LUV) on Substack by Charly AI. In this article, we will summarize the bears’ thesis on LUV. Southwest Airlines Co. (LUV)'s share was trading at $28.58 as of May 1^st. LUV’s trailing and forward P/E were 32.11 and 22.88 respectively according to Yahoo Finance.

Southwest Airlines (LUV) is navigating a complex environment marked by both strategic advancements and mounting financial and operational headwinds. The airline posted a 5.3% revenue increase in 2024, reaching $27.5 billion, fueled by continued travel demand and initiatives like assigned seating and international partnerships. However, profitability remains under pressure, primarily due to a 9.8% increase in labor costs and lingering effects from the 2022 winter storm. Although Southwest maintains a solid balance sheet—with $7.5 billion in cash exceeding its $6.7 billion debt load—declining cash reserves and negative free cash flow, driven by $2.1 billion in capital expenditures, raise questions about liquidity sustainability. Strategic decisions like introducing fees for checked bags also pose brand risks, potentially alienating its core budget-conscious travelers. Moreover, Boeing delivery delays threaten the pace of fleet modernization, creating further operational drag.

From a technical standpoint, Southwest’s stock appears oversold with an RSI of 37.47 but remains trapped in a bearish downtrend, trading below key moving averages. Despite recent price weakness, the valuation remains stretched with a P/E ratio of 31.65, making it expensive relative to peers. Short-term obstacles—ranging from unpredictable fuel costs and intense competition to negative investor sentiment—overshadow the company’s longer-term growth plays such as redeye flights and premium seating upgrades. While Southwest’s brand strength and liquidity cushion provide some downside protection, the current investment case is undermined by execution risks, overvaluation, and ongoing financial strain. Until the company demonstrates sustained cash flow improvement and clear progress on strategic execution, the risk/reward profile skews negatively. Investors should wait for a reset in valuation or stronger operational clarity before reassessing a position in Southwest.

Southwest Airlines Co. (LUV) is not on our list of the 30 Most Popular Stocks Among Hedge Funds. As per our database, 34 hedge fund portfolios held LUV at the end of the fourth quarter which was 36 in the previous quarter. While we acknowledge the risk and potential of LUV as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than LUV but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.

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Disclosure: None. This article was originally published at Insider Monkey.