What happened

Shares of digital advertising platform PubMatic (PUBM -3.59%) jumped 42% higher in the last week as of Friday at 11 a.m. EST, according to data provided by S&P Global Market Intelligence. Worries over digital ad spending growth have been weighing on some companies in this space as Apple's user privacy changes have been having an impact this year. Eventually, similar changes will occur at Alphabet's Google as well. 

That didn't slow PubMatic in the third quarter of 2021, though. Revenue of $58.1 million (up 54% year over year) was well ahead of management's forecast for as much as $53 million. The company said its business from connected TV (CTV, digital ads delivered via an internet-connected television service) grew "seven times over the third quarter of 2020."  

Two people's stocking feet in front of a TV screen.

Image source: Getty Images.

So what

In addition to robust revenue growth, tiny PubMatic continues to be highly profitable as well. Adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization) was $24.3 million, good for an adjusted EBITDA margin of 42%.  

Though this is a small player in the digital ad management software niche, PubMatic is doing impressive things. The number of publishers it helped monetize ad inventory for (like when a video producer makes ad time available for purchase for marketers) increased to 154 during the third quarter, compared with just 114 a year ago. New products that help marketing campaigns reach their intended audience without user information tracking being shut down via Apple's privacy updates helped PubMatic score new customers.

Now what

In a growing digital ad industry already worth hundreds of billions of dollars in spending every year, PubMatic said it only brings in about 2% to 3% of its total addressable market. Clearly, this small outfit has plenty of potential left ahead of it.  

The outlook for Q4 reinforces this. Revenue is expected to be at least 32% higher year over year in spite of a busy season in 2020 due to e-commerce holiday shopping and political advertising related to the U.S. elections.  

PubMatic trades for about 11 times trailing-12-month sales. Free cash flow was $30.6 million through the first nine months of 2021 compared with being slightly negative in 2020, so the company is making fast progress on the bottom line as well. Given its growth trajectory, the stock isn't so unreasonably valued right now if investors are eyeing the long-term potential for this scrappy little ad software business.