Hostelworld Group (LON:HSW): A 47% Undervaluation Opportunity in Travel Tech?

Hostelworld Group (LON:HSW), a global leader in hostel booking and travel technology, presents a compelling investment opportunity. A Discounted Cash Flow (DCF) analysis suggests the stock is undervalued by 47%, yet conservative analyst targets trail behind this intrinsic value estimate. Amid macroeconomic uncertainties, this gap creates a rare margin of safety for investors willing to look beyond short-term volatility.

The DCF Case for 47% Undervaluation

The DCF model, a cornerstone of valuation analysis, paints a bullish picture for Hostelworld. Here's why:

• Discount Rate & Terminal Growth: The model uses an 8.2% discount rate, reflecting the company's moderate risk profile and market conditions. The 1.5% terminal growth rate (aligned with long-term inflation) ensures conservative assumptions about future cash flows.
• Free Cash Flow (FCF) Projections: Hostelworld's FCF is expected to grow from €5 million in 2023 to €14 million by 2025, signaling a recovery from pandemic-era losses. This trajectory supports a fair value estimate of £2.60 per share, far above its current price of £1.21 (as of June 19, 2025).

The 47% undervaluation implies significant upside potential if the company meets its FCF targets. Even a modest reduction in the discount rate or a slight acceleration in growth could amplify this gap further.

Analyst Targets Lag Behind DCF Optimism

While the DCF suggests substantial upside, analyst targets are more cautious, averaging £1.95 (a 61% premium to current prices). This discrepancy arises from differing assumptions about risk and growth timelines:

• Growth vs. Value: Analysts may prioritize near-term risks, such as macroeconomic slowdowns or competition from OTAs like Booking Holdings. The DCF, however, accounts for Hostelworld's 57.5% annual earnings growth potential over the next three years, driven by AI-driven efficiencies and reduced marketing costs.
• Margin of Safety: The average analyst target still aligns with a “Buy” consensus, with some firms like Canaccord Genuity setting a £2.47 price target. This underscores a 70% upside, suggesting analysts are slowly warming to the stock's long-term narrative.

Relative Valuation: Expensive on PE, Cheap on Intrinsic Value

Hostelworld's 21.7x P/E ratio exceeds both its peers (17.7x) and the European hospitality sector average (18.7x). Critics argue this makes the stock overvalued, but this metric ignores its high growth trajectory. A PEG ratio (P/E to growth) of 0.38 (21.7 P/E divided by 57.5% growth) reveals a stark undervaluation, as a PEG below 1 typically signals a bargain.

Risks to Consider

1. Macroeconomic Sensitivity: Travel demand could weaken if global GDP growth slows. Hostelworld's reliance on budget travelers makes it vulnerable to economic downturns.
2. Debt Management: The firm's debt-to-equity ratio is elevated, though recent £5 million share buybacks signal confidence in its financial health.
3. Competition: Rivals like Hostelbookers and local players may undercut margins in key markets.

Investment Conclusion: A Compelling Buy with a Margin of Safety

Despite risks, Hostelworld's 47% undervaluation creates a rare opportunity to buy a travel tech leader at a discount. The £1.21 share price offers a two-thirds cushion below the DCF-derived fair value, while analyst targets imply a 61% minimum upside. For investors with a 3–5 year horizon, this could be a high-conviction “Buy”.

Actionable Advice:
- Aggressive Investors: Allocate 5–10% of a growth portfolio to Hostelworld now, targeting a £1.50–£2.00 price target.
- Conservative Investors: Wait for dips below £1.10 (a 10% pullback) to average into positions.

Hostelworld's valuation gap, fueled by strong FCF growth and undeterred by high P/E multiples, positions it as one of 2025's most compelling travel tech plays.

Always conduct your own research and consult with a financial advisor before making investment decisions.