Hostelworld: should investors buy this small-cap stock as travel recovers?

Hostelworld (LSE:HSW) suffered in the pandemic as travel ground to a halt. But with the industry rebounding strongly, is this small-cap stock now a buy?

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Young mixed-race couple sat on the beach looking out over the sea

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

After three years, it seems that international travel is almost back in full swing. Indeed, the last weekend of May saw the busiest day for UK airports since the pandemic struck, with around 3,000 flights departing.

So, does this make small-cap stock Hostelworld (LSE: HSW) a buy today? Let’s take a look.

Recovering business

Founded in 1999, Dublin-based Hostelworld is an online travel agency with hostel partners in 180 countries. Its brand is very well known with budget-conscious travellers, especially millennials. In fact, the company is today the largest hostel-focused booking platform in the world.

Like all travel-related companies, its business took a huge hit during the pandemic. Group revenue went from €80.7m in 2019 to just €15.4m in 2020 (and €16.9m in 2021). Net profit dropped from €8.4m in 2019 to a loss of €49m a year later.

However, business rebounded strongly last year, as the group’s full-year loss decreased to €17m. Plus, adjusted earnings reached €1.3m.

Analyst forecasts see revenue growing to €91m this year and €102m in 2024. Crucially, they also see a return to profitability for the first time since 2019.

So, it would appear that Hostelworld is a company on the up again. But what about the stock?

Valuation

The share price is up 34% in the last year. However, over a five-year period, the stock is down 61%.

This sees the shares trading on a forward-looking price-to-earnings (P/E) ratio of 22. The P/E would drop to around 13 next year, assuming analyst estimates are correct, which isn’t always the case.

That looks very cheap to me. Plus, the company’s €13.4m net debt should be manageable now that cash is flowing into the business again.

Interestingly, of the seven brokers covering the stock in the last three months, four rate it as a ‘buy’ and three as a ‘strong buy’. That means these City analysts think the shares represent good value.

Building connections

Over half of Hostelworld’s customers are solo travellers, and the company says it has evidence that the main reason they stay in hostels is because they want to meet other travellers. So the firm has leaned into this by building social network features into its platform.

One example is that once a customer has booked through the app, they can chat with fellow travellers due to stay in the same hostel and city. Since the launch of these features last year, the firm has seen a significant increase in engagement and bookings.

I think these social features are a smart move. They can keep customers on the platform for longer and not just when browsing and booking. And the longer people are on the app, the more chance Hostelworld has to improve the monetisation of its user base.

Will I buy the stock?

With its strong brand and positioning in an established niche market, I think Hostelworld is a potentially interesting investment.

That said, inflation and a potential global recession are concerns here. But perhaps these factors could actually benefit the company as cash-strapped travellers explore more budget-friendly accommodation options.

As a result, the stock is going on my watchlist while I dig in further. I have Airbnb in my portfolio, but this might make a decent accompaniment in the online travel booking space.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Ben McPoland has positions in Airbnb. The Motley Fool UK has recommended Airbnb. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Smart young brown businesswoman working from home on a laptop
Investing Articles

Should I be watching the Greatland Gold (LSE: GGP) share price?

Recent rallies in valuable metal prices has boosted the Greatland Gold share price, but is there still an opportunity for…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

The abrdn share price is down 23% in the last year, should I buy?

Asset management firms have had a rough time lately, but with the abrdn share price down heavily, is now the…

Read more »

Hand of a mature man opening a safety deposit box.
Investing Articles

If I’d invested £5k in red hot BAE Systems shares 5 years ago here’s what I’d have today

BAE Systems shares have smashed the FTSE 100 for years and Harvey Jones is keen to buy more as they…

Read more »

Investing Articles

How I’d aim to earn £16,100 in passive income a year by investing £20k in a Stocks and Shares ISA

Harvey Jones is building a portfolio of high-yielding FTSE 100 dividend stocks that should give him a high and rising…

Read more »

Investing Articles

Down 8% in a month! The BP share price is screaming ‘buy, buy, buy’ at me right now 

When crude oil falls, the BP share price invariably follows. Harvey Jones is wondering whether this is the right point…

Read more »

Bus waiting in front of the London Stock Exchange on a sunny day.
Investing Articles

Could the 9.8% M&G dividend yield get even bigger?

Christopher Ruane reckons that, although the M&G dividend yield is already close to a double-digit percentage, it could get better…

Read more »

Investing Articles

How much passive income could I earn by putting £380 a month into a Stocks and Shares ISA?

Christopher Ruane explains how he'd aim to turn a Stocks and Shares ISA into four-figure passive income streams each year.

Read more »

Investor looking at stock graph on a tablet with their finger hovering over the Buy button
Investing Articles

2 passive income stocks I’m buying before an interest rate cut

With the market expecting interest rates to fall in August, time might be running out for investors looking to buy…

Read more »