It’s often best not to pay too much attention to the price targets put out on FTSE stocks by brokers. They can end up being a bit wide of the mark, in my experience.
Nevertheless, they can be worth noting when there’s a wide disparity between a target and the actual price. It suggests a stock might be significantly undervalued and worth digging into.
One that recently caught my eye was Hostelworld Group (LSE: HSW). The company has a market-cap of £176m, which means it’s classed as a small-cap stock.
On 18 July, broker Canaccord Genuity reiterated its Buy rating on the share and slapped a 247p price target on it. That’s 75% higher than the current price of 141p.
Is this a stock I should consider buying this summer? Let’s explore.
Rebuilding profitability
Many readers will recognise Hostelworld as a leading online platform for booking… hostels. It has partners in over 180 countries.
It’s been a few years since I’ve used the app as I prefer Airbnb and hotels nowadays when travelling. But I remember it as hassle-free and impressive when I used it a couple of times in Europe.
So with Covid restrictions in the rearview mirror and global travel back in full swing, it doesn’t surprise me that 2023 was a record year for the company.
Revenue increased 32% year on year to €93.3m, surpassing pre-pandemic levels. And the firm returned to profitability after the difficult pandemic years, with an operating profit of €5m compared to a loss of €13.6m in 2022. Adjusted EBITDA totalled €18.4m.
In a recent H1 trading update, it said net bookings rose 9% to 3.7m, driven by strong consumer demand for low-cost destinations in Asia and Central America. Adjusted EBITDA surged 88% to €9.6m, while net debt was down to just €2.6m.
Building connections
Now, I’d say competition’s a risk here. Booking Holdings, while primarily focused on hotels, also lists a selection of hostels. And new entrants could always render Hostelworld’s platform obsolete.
Therefore, I fear it may not have a durable competitive advantage (what Warren Buffett calls a ‘moat’).
However, to its credit, Hostelworld’s built a series of data-driven social features that connect fellow travellers. Indeed, it calls itself a ‘social-network-powered online travel agent’. And its mission is to “help travellers find people to hang out with“.
After making a booking, travellers can visit the profile of those staying in their hostel, as well as message others visiting that location. I love this social strategy as it differentiates the platform and makes it stickier.
Moreover, as an asset-light business, Hostelworld benefits from lower operational costs compared to traditional travel agencies. This allows for the rapid expansion of new features without significant capital expenditure.
I can imagine, say, dating features might be very popular among some travellers. And I see a nice opportunity to increase overall platform advertising revenue.
I’m interested
The global hostel market’s expected to expand long term, driven by budget-conscious travellers, particularly among Generation Z. And the company looks perfectly positioned to capitalise on that trend.
Meanwhile, the stock’s trading at 14.2 times forecast earnings for 2024, dropping to 11.3 times next year. That looks good value. I’m considering taking a small starter position in Hostelworld in August.
