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

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.