European Risks Will Constrain Earnings But Unlock Digital Potential

Key Takeaways

• High dependence on Europe exposes revenue growth to regional risks, while short booking windows limit the impact of loyalty and upselling strategies.
  
• Competitive pressure and regulatory risks could offset gains from social travel initiatives, new tech, and sustainability efforts, constraining future margins and growth.
  
• Rising marketing expenses, market over-reliance, and shifting customer preferences threaten profitability, revenue stability, and the long-term viability of Hostelworld's core hostel-focused business.

Catalysts

Operates as an online travel agent focused on the hostel market in Europe, the United States of America, Asia, Africa, and Oceania.

• While Hostelworld is well-positioned to capture increased international travel among Millennials and Gen Z-demonstrated by recovering booking volumes and app engagement growth-its high exposure to Europe means regional economic shocks or regulatory changes could cause revenue growth to underperform the global travel trend.
  
• Although surging smartphone penetration and rising demand for digital-first, experience-based travel support Hostelworld's migration to an app-centric platform (with app bookings now making up 50% of the mix), the persistent, short customer booking lead times may limit the effectiveness of upselling and loyalty efforts, potentially constraining long-term customer lifetime value and associated revenues.
  
• The company's social travel strategy and new features like Elevate are increasing commission rates and customer engagement; however, if price-sensitive travelers continue shifting from Europe to low-cost regions, ongoing regional bed price deflation could offset gains from higher commission rates, putting downward pressure on average booking value and net margin.
  
• Investments in proprietary technology and new monetization layers (such as social network features and budget accommodation launches) may boost future conversion rates and expand the addressable market, but there remains a significant risk that larger online travel agencies or new entrants could erode Hostelworld's pricing power, compress commission rates, and limit net margin expansion.
  
• While sustainability initiatives align Hostelworld with the growing eco-focus among youth travelers, tightening regulations around platform-based travel businesses, along with the threat of a generational shift toward premium or private accommodation over shared hostels, could constrain future earnings growth and reduce hostel inventory, limiting transaction volume and long-term revenue scalability.

Hostelworld Group Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Hostelworld Group compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Hostelworld Group's revenue will grow by 10.8% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 8.3% today to 13.7% in 3 years time.
• The bearish analysts expect earnings to reach €17.2 million (and earnings per share of €0.15) by about September 2028, up from €7.7 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 14.3x on those 2028 earnings, down from 21.3x today. This future PE is lower than the current PE for the GB Hospitality industry at 16.7x.
• Analysts expect the number of shares outstanding to grow by 1.65% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.57%, as per the Simply Wall St company report.

Hostelworld Group Future Earnings Per Share Growth

Risks

• The company's revenue growth has remained essentially flat year-over-year, with only recent positive momentum supported by temporary factors like the launch of the Elevate tool, making long-term top-line revenue growth uncertain if those factors are not sustained.
  
• Rising paid marketing and customer acquisition costs (notably, marketing peaked at 51 percent of net revenue in the first half and is expected to remain at the top end of guidance) have eroded net margin and EBITDA, which could persist or worsen if digital advertising inflation continues, directly pressuring profitability.
  
• Persistent price deflation in key European markets and a shift in customer preference toward lower-cost destinations such as Asia have put downward pressure on average booking value, negatively affecting both earnings and long-term revenue quality as the geographic mix shifts.
  
• Hostelworld remains highly reliant on the European market, which represents over 60 percent of bookings, exposing the company to heightened risk from regional economic downturns or regulatory changes, thereby increasing the volatility of future revenues and earnings.
  
• The trend toward alternative accommodation categories and changes in traveler preferences, such as moves to private or premium lodging and the blurred boundaries with serviced apartments, threatens Hostelworld's core hostel niche and poses a risk to long-term demand, market share, and gross margin.

Valuation

• The assumed bearish price target for Hostelworld Group is £1.31, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Hostelworld Group's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of £2.36, and the most bearish reporting a price target of just £1.31.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be €125.5 million, earnings will come to €17.2 million, and it would be trading on a PE ratio of 14.3x, assuming you use a discount rate of 8.6%.
• Given the current share price of £1.16, the bearish analyst price target of £1.31 is 11.1% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.