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It's not often that you see a small cap on the FTSE fully shared The index is tipped by reputable brokers such as German Bank. But this up-and-coming Dublin team has been popping up on my radar all week, so I had to know the whole truth.
Hostelworld Group (LSE: HSW) is a youth-focused travel company based in Ireland with a small market capitalization of £168.7m. With an increase of only 2.2%, growth this year has been slow. However, the brokers suddenly decided it was the action of the week.
I'm on a mission to find out why.
A small player with a powerful impact
Although small in size by stock market standards, Hostelworld is very popular with today's young travelers. It is one of the largest hostel booking apps in the world, with 16,500 listings in 180 countries worldwide.
Earlier this week, I noticed that three major brokerages had given “buy” ratings to the stock. These were Deutsche Bank on October 12 and Shore Capital and Canaccord Genuity three days later. For such an unknown small-cap stock, that caught my attention. I find it strange that top brokers tip small cap stocks.
Positive results
The reason quickly became apparent. On October 8, 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 drop in the average net value of reserves, it remains confident in its business model and future growth prospects.
This strong financial performance, along with its unique position in the market, is likely one of the reasons for the sudden interest from brokers.
Risks and ratios
The online travel market is very competitive, with players such as Reserva.com and Expedia offering similar services. Increased competition could lead to price pressure and a reduction in market share. Additionally, economic downturns can negatively impact travel spending, leading to lower demand for hostel accommodations. This could negatively affect your revenue and profitability.
When checking comparable metrics, Hostelworld appears to eclipse Booking.com when it comes to value. It has a price-to-earnings (P/E) ratio of 13.2 compared to Booking's 29.1 and is undervalued by almost 60%. The reserve is only undervalued by 40%. Airbnbanother competitor, has a P/E ratio of 17.
Furthermore, its balance sheet is impeccably clean, with no debt, €5 million in cash and €62 million in equity. Booking.com, on the other hand, is drowning in $16.8 billion in debt and has negative equity. Of course, it's much smaller than most of its competitors, so these comparisons should be taken with a grain of salt. On the plus side, small-cap stocks often have the potential for bigger gains since the price is easier to move.
my verdict
I believe that Hostelworld, as a leader in a niche market with no debt and strong profits, could grow to become a key player in the travel industry. There will be some bumps in the road and unexpected travel disruptions are a key risk to consider.
Overall, I think your prospects seem excellent. If travel continues to grow unhindered, it should have a bright future. Unfortunately, it is not yet listed on my broker platform, otherwise I would buy the stock today.
