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It’s not often I see a small cap on the FTSE All-share index get tipped by big-name brokers like Deutsche Bank. But this up-and-coming Dublin outfit has been popping up on my radar all week, so I had to get the lowdown.
Hostelworld Group (LSE: HSW) is a youth-focused travel company based in Ireland with a tiny £168.7m market cap. Up by only 2.2%, growth this year has been slow. Yet brokers suddenly decided it was the stock of the week.
I’m on a mission to find out why.
A small player with a far-reaching impact
Although small in size by stock market standards, Hostelworld is wildly popular among the travelling youth of today. It’s one of the largest hostel booking apps in the world, with 16,500 listings in 180 countries globally.
Earlier this week, I noticed three major brokers had put in ‘buy’ ratings on the stock. These were Deutsche Bank on 12 October and Shore Capital and Canaccord Genuity, three days later. For such an unknown small-cap share, that caught my attention. I find it rare for top brokers to tip small-cap stocks.
Positive results
The reason quickly became obvious. On 8 October, Hostelworld released a positive earnings report for the first half of 2024, with net bookings up 9% year on year and an 88% increase in adjusted EBITDA. The company’s social network continues to perform well, contributing to a significant reduction in marketing expenses as a percentage of revenue. Despite a slight decline in average net booking value, it remains confident in its business model and future growth prospects.
This strong financial performance, coupled with its unique market position, is likely a reason for the sudden interest from brokers.
Risks and ratios
The online travel market is highly competitive, with players like Booking.com and Expedia offering similar services. Increased competition could lead to price pressure and reduced market share. Additionally, economic downturns can negatively impact travel spending, leading to lower demand for hostel accommodations. This could adversely affect its revenue and profitability.
Checking like-for-like metrics, Hostelworld appears to outshine Booking.com when it comes to value. It has a trailing price-to-earnings (P/E) ratio of 13.2 compared to Booking’s 29.1 and is undervalued by almost 60%. Booking is only undervalued by 40%. Airbnb, another competitor, has a P/E ratio of 17.
Furthermore, its balance sheet is squeaky clean, with no debt, €5m in cash, and €62m in equity. Booking.com, on the other hand, is drowning in $16.8bn of debt and has negative equity. Of course, it’s a lot smaller than most of its competitors so these comparisons should be taken with a pinch of salt. On the plus side, low-cap stocks usually have the potential to make larger gains as the price is easier to move.
My verdict
I think Hostelworld, as a leader in a niche market with no debt and strong earnings, could grow to become a key player in the travel industry. There would be some hurdles along the way and unexpected travel disruptions are a key risk to consider.
Overall, I think its prospects look great. If travel continues to grow unhindered, it should have a bright future. Sadly, it isn’t listed on my broker platform yet otherwise I would buy the stock today.
