Monetizable Social Features Will Capture Global Youth Travel

Key Takeaways

• Rapid expansion of social features and increased commission rates could enable higher-than-expected margin and revenue growth through enhanced user adoption and cross-selling.
  
• Strong balance sheet and aggressive capital deployment empower consolidation and expansion, positioning Hostelworld to lead in the youth and budget travel sectors globally.
  
• Hostelworld's future growth is threatened by changing travel trends, intensifying competition, climate policies, economic pressures, and an inability to adapt quickly to evolving customer preferences.

Catalysts

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

• Analyst consensus believes that the growing social network will gradually pressure marketing costs and improve margins, but this underestimates the potential for a dramatic step-change if app-centric social adoption continues at current rates, possibly lowering marketing as a percentage of revenue below guidance and structurally boosting net margins.
  
• While analysts broadly expect the success of Elevate and rising commission rates to offset price deflation, early adoption rates suggest the platform could achieve and sustain commission rates above the targeted 16 percent far sooner than forecast, leading to a structural re-rating of take rates and a step-up in net revenue per booking.
  
• The upcoming launch and global rollout of monetizable social features and seamless budget accommodation integration represent untapped levers; as these come online, they will rapidly expand Hostelworld's addressable market, enhance cross-sell opportunities, and increase both booking volumes and ancillary revenues, resulting in higher top-line growth and improved earnings quality.
  
• With a highly flexible cash-positive balance sheet and reinvigorated capital allocation (notably dividends and buybacks), Hostelworld is uniquely positioned to accelerate M&A in adjacent experiential travel businesses-potentially consolidating niche platforms and capturing a larger share of the fast-growing youth and experiential travel market, which could significantly enhance earnings and revenue diversification.
  
• Hostelworld's growing dominance in trending travel corridors, especially intra-Asia and routes from Europe to Asia, coupled with its expanded local market teams and proprietary technology, positions the company to capture outsized gains from the global shift toward budget, sustainable, and community-driven travel, enabling superior booking growth and market share expansion relative to legacy OTAs.

Hostelworld Group Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more optimistic perspective on Hostelworld Group compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts.
• The bullish analysts are assuming Hostelworld Group's revenue will grow by 12.6% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from 8.3% today to 14.9% in 3 years time.
• The bullish analysts expect earnings to reach €19.6 million (and earnings per share of €0.17) by about August 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 bullish analyst cohort, the company would need to trade at a PE ratio of 23.2x on those 2028 earnings, up from 21.6x today. This future PE is greater than the current PE for the GB Hospitality industry at 20.0x.
• Analysts expect the number of shares outstanding to grow by 2.37% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.54%, as per the Simply Wall St company report.

Hostelworld Group Future Earnings Per Share Growth

Risks

• The company faces pressure from long-term climate policies and potential increases in carbon taxes, which could make long-distance youth and backpacker travel less affordable, ultimately hurting Hostelworld's long-term booking volumes and top-line revenue.
  
• Shifts in work and travel trends, such as the growing popularity of remote and flexible work, might lead digital nomads and younger travelers to prefer alternative accommodation types outside of hostels, reducing Hostelworld's addressable market and suppressing future revenue growth.
  
• A heavy reliance on third-party hostel inventory and increasing competition from larger, resource-rich OTAs like Booking.com and Airbnb puts Hostelworld at risk of unfavorable margin agreements, margin erosion, and a further dilution of market share, which threatens both revenue and net margins.
  
• Hostelworld's revenues and earnings remain exposed to persistent bed price deflation in key European markets, currency headwinds from a weaker US dollar, and the ongoing risk of geopolitical instability or new pandemics that could disrupt travel demand and lower hostel occupancy rates.
  
• Despite ongoing product innovation, failure to keep pace with rapidly changing traveler preferences-including the rise of home-sharing, micro-stays, and experience-based travel-could mean declining customer retention and acquisition, leading to stagnation or decline in revenue and net earnings over the long term.

Valuation

• The assumed bullish price target for Hostelworld Group is £2.36, which is the highest 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 bullish 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 bullish analysts, you'd need to believe that by 2028, revenues will be €131.7 million, earnings will come to €19.6 million, and it would be trading on a PE ratio of 23.2x, assuming you use a discount rate of 8.5%.
  
• Given the current share price of £1.18, the bullish analyst price target of £2.36 is 50.1% 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.