Investments In AI And Social Platforms Will Elevate User Experience, Driving Future Customer Engagement

Key Takeaways

• Growth in social network and app bookings reduces marketing costs, enhances margins, and supports earnings and revenue growth.
  
• Investments in AI, social platform, and hostel onboarding boost user engagement, inventory, and booking opportunities, driving potential revenue growth.
  
• The shift to budget destinations and reliance on social network strategies may negatively impact net revenue and margin despite booking growth.

Catalysts

Operates as an online travel agent focused on the hostel market worldwide.

• The growth in the social network, with 80% of bookings now coming from social members, is expected to reduce marketing costs and increase customer return rates, which should bolster net margins.
  
• The successful integration and expansion of app bookings, now 47% of total bookings, are contributing to decreased marketing expenses as a percentage of net revenue, positively impacting earnings.
  
• The ongoing investments in AI and the social platform are anticipated to enhance user experience, potentially driving higher customer engagement and retention, which should support future revenue growth.
  
• Expansion of market coverage and streamlined hostel onboarding processes may increase inventory and thus booking opportunities, expected to drive revenue growth.
  
• A strengthened balance sheet with a net cash position gives Hostelworld financial flexibility to pursue strategic investments and growth opportunities, potentially improving earnings and market valuation.

Hostelworld Group Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Hostelworld Group's revenue will grow by 9.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from 9.9% today to 18.4% in 3 years time.
• Analysts expect earnings to reach €21.9 million (and earnings per share of €0.18) by about March 2028, up from €9.1 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 17.5x on those 2028 earnings, down from 21.1x today. This future PE is lower than the current PE for the GB Hospitality industry at 18.1x.
• Analysts expect the number of shares outstanding to grow by 0.72% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.08%, as per the Simply Wall St company report.

Hostelworld Group Future Earnings Per Share Growth

Risks

• The shift towards lower-cost destinations, especially in South Asia with significantly lower bed prices compared to Europe, has resulted in an 8% decline in average booking value (ABV), which negatively impacts net revenue growth.
  
• The preference for budget destinations may lead to decreased earnings as net revenue was down by 1% year-over-year despite a 6% increase in net bookings.
  
• Despite the growth in solo traveler bookings, the reduced booking value per destination could weaken Hostelworld’s overall revenue performance.
  
• Continued pressure on European markets, including a decline in travelers from the U.S., Canada, and Oceania into Europe, could undermine revenue potential from historically higher-value regions.
  
• Heavy reliance on the social network strategy to reduce marketing costs might pose a risk if this does not continue to drive sufficient app adoption and bookings growth, potentially impacting net margin if marketing expenses do not align with revenue projections.

Valuation

• The analysts have a consensus price target of £2.017 for Hostelworld Group based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of £2.47, and the most bearish reporting a price target of just £1.56.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be €119.0 million, earnings will come to €21.9 million, and it would be trading on a PE ratio of 17.5x, assuming you use a discount rate of 8.1%.
  
• Given the current share price of £1.3, the analyst price target of £2.02 is 35.6% 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.