It’s not often that I see a little hat on my head FTSE All Shares index receive tips from well-known brokers such as Deutsche Bank. But this up-and-coming band from Dublin had been on my radar all week, so I had to find out the details.

Hostelworld Group (LSE: HSW) is an Irish travel agency focused on adolescent people with a market capitalization of just £168.7 million. Up just 2.2%, growth has been sluggish this year. However, brokers suddenly decided that this was the stock of the week.

I’m on a mission to find out why.

A compact player with a far-reaching impact

Although Hostelworld is compact by stock market standards, it is extremely popular among today’s traveling youth. It is one of the largest hostel booking apps in the world, with 16,500 offers in 180 countries around the world.

Earlier this week, I noticed that three major brokers had issued “buy” ratings on the stock. These were Deutsche Bank on October 12 and Shore Capital and Canaccord Genuity three days later. For such an unknown compact cap share, this caught my attention. I find that top brokers rarely tip compact caps.

Positive results

The reason quickly became obvious. On October 8, Hostelworld released a positive earnings report for the first half of 2024, with net bookings up 9% year-over-year and adjusted EBITDA up 88%. The company’s social network continues to perform well, contributing to a significant reduction in marketing spend as a percentage of revenue. Despite a slight decline in average net booking value, it remains confident in its business model and future growth prospects.

These robust financial results combined with an exceptional market position are likely the reason for the sudden interest from brokers.

Risks and indicators

The online travel market is highly competitive, with players such as Reservation.com AND Expedia offering similar services. Increased competition may lead to pricing pressure and reduced market share. Additionally, an economic downturn may negatively impact travel spending, leading to lower demand for hostel accommodation. This may adversely affect its revenues and profitability.

Checking similar metrics, Hostelworld seems to outshine Booking.com in terms of value. It has a trailing price-to-earnings (P/E) ratio of 13.2 compared to Booking’s 29.1 and is undervalued by almost 60%. The reservation value is reduced by only 40%. Airbnbanother competitor, has a P/E ratio of 17.

Moreover, its balance sheet is immaculate, it has no debts, it has EUR 5 million in cash and EUR 62 million in equity. On the other hand, Booking.com is drowning in $16.8 billion in debt and has negative equity. Of course, it is much smaller than most of its competitors, so this comparison should be taken with a pinch of salt. The upside is that small-cap stocks usually have the potential to make higher profits because they are easier to move in price.

My verdict

I think that Hostelworld, as a leader in a niche market, without debt and with high profits, can develop and become a key player in the tourism industry. There may be some hiccups along the way, and a key risk to consider is unexpected travel disruptions.

Overall, I think the prospects are great. If travel continues to grow unimpeded, it should have a brilliant future ahead of it. Unfortunately, it is not yet listed on my brokerage platform, otherwise I would buy the shares today.