Slow growth and no profit. Why are traders tipping this small-cap FTSE share as a buy?

I rarely see a small cap on top FTSE Shares Everything The index is offered by brokers with big names like Deutsche Bank. But this upcoming Dublin outfit has been on my radar all week, so I had to get the lowdown.

Hostelworld Group (LSE: HSW) is an Irish-based youth-focused travel company with a market cap of £168.7m. Up only 2.2%, growth this year has been slow. However, the dealers suddenly decided that it was the stock of the week.

I'm about to find out why.

A small player with a far-reaching impact

Although small in size by stock market standards, Hostelworld is very popular with today's traveling youth. It is one of the largest hostel booking apps in the world, with 16,500 listings in 180 countries around the world.

Earlier this week, I noted that three major brokerages had put 'buy' ratings on the stock. These were Deutsche Bank on 12 October and Shore Capital and Canaccord Genuity, three days later. For such an unknown assignment, which caught my eye. I find it rare for top traders to give advice on small stocks.

Good results

The reason quickly became clear. On October 8, Hostelworld released a positive earnings report for the first quarter of 2024, with net bookings up 9% year-on-year and an 88% increase in adjusted EBITDA. The company's social media continues to perform well, contributing to a significant decrease in marketing costs as a percentage of revenue. Despite the slight decline in net bookings, it remains confident in its business model and future growth prospects.

This strong financial performance, coupled with its unique market environment, is likely the reason for the sudden interest from investors.

Risks and rates

The online travel market is very competitive, with similar players Booking.com again Expedia offering similar services. Increased competition can lead to price pressures and reduced market share. Additionally, a recession can have a negative impact on travel spending, leading to a decrease in demand for hostel accommodation. This may have a negative impact on its revenue and profitability.

Examining metrics like those, Hostelworld seems to outperform Booking.com when it comes to value. It has a trailing price-to-earnings (P/E) ratio of 13.2 compared to a booking of 29.1 and is undervalued by nearly 60%. Reservations are taken 40% less. Airbnbanother competitor, has a P/E ratio of 17.

Furthermore, its balance sheet is clean, with no debt, €5m in cash, and €62m in value. On the other hand, Booking.com is drowning in $16.8bn of debt and has negative equity. Of course, it is much smaller than many of its competitors so these comparisons should be taken with a grain of salt. On the other hand, low-cap stocks usually have the potential to make big gains as the price is easy to move.

My decision

I think that Hostelworld, as a leader in a niche market with no debt and strong income, can grow to become an important player in the tourism industry. There can be obstacles in the way and unexpected travel disruptions are a major risk to consider.

Overall, I think its prospects look good. If the journey continues to grow without obstacles, it should have a bright future. Sadly, it is not listed on my broker platform yet otherwise I would have bought the stock today.