It's been a rough quarter for the digital advertising sector.

Social media stocks, including Facebook-parent Meta PlatformsSnapTwitter, and Pinterest, posted weak revenue growth. At the same time, the top-line performance at Roku and Google-parent Alphabet was also disappointing.

Against that backdrop, you might think adtech company Perion Network (PERI -0.85%) would also deliver underwhelming results, but the Israel-based company reported another strong quarter.

Perion connects ad buyers and sellers through its Intelligent Hub (iHub), which enables cost-effective ad placements for brands and publishers, and also gives them value-added, customizable tools to improve ROI.

In the second quarter, Perion's revenue jumped 34% to $146.7 million, getting a bump from its acquisition last fall of video monetization platform Vidazoo. That result essentially matched analyst estimates, but profits have also ramped up as the iHub scales. Marginal costs for increased traffic on the platform are minimal after traffic acquisition costs, or how much Perion pays publishers for their ad space. In fact, adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) margin after traffic acquisition costs was 47%, up from 33% in the quarter a year ago, showing the business model is highly profitable.

Perion stock jumped 10% on the news, but the stock still seems underappreciated by Wall Street.

Why Perion is beating the digital ad slump

The performance of the biggest digital ad companies shows a clear slowdown in advertising demand, but Perion was unbothered by that trend for a number of reasons. First, the company continues to see strong growth in video and Connected TV (CTV), with those segments increasing 273% and 90% in revenue, respectively, though the Vidazoo acquisition appeared to be the primary reason for the triple-digit growth in video. Second, the company is benefiting from a secular trend toward direct response advertising, a form of advertising that includes a call to action such as clicking on a link, visiting a website, or even making a purchase.

Perion has sought to differentiate itself through direct response advertising. The company's technology, for example, can enable what CEO Doron Gerstel calls a "connected cart," allowing someone to buy a product they just saw in a CTV ad by scanning a QR code. The technology can even adjust what is being advertised to make sure it's in stock at the partnered retailer.

Advertisers are shifting budgets to direct response, which is more trackable and offers more immediate ROI, and that's favoring Perion. In fact, the company saw record RPM (revenue per thousand impressions) in search advertising as the premium for certain keywords has increased over time. Its multichannel business model, which includes search, social, display, and video, helps it capture ad demand as it shifts. Gerstel said in an interview with The Motley Fool that he believes that his company and Google are the only ad companies that offer such a broad multichannel mix. 

Perion also benefits from being much smaller than the digital advertising giants, making it easier for the company to grow into a giant market worth hundreds of billions of dollars as it only needs to take a bit of market share to grow by 34%.

In addition to its iHub, Perion is also benefiting from its cookieless technology, SORT, which ensures user privacy and delivers a better return on ad spend than traditional third-party cookies. Customers using SORT nearly doubled from 65 in the first quarter to 126 in the second quarter, showing strong momentum. 

The future looks bright

Management maintained its revenue guidance for the full year at $620 million to $640 million, or 32% growth at the midpoint, and it raised its EBITDA guidance from $98 million to $102 million to at least $102 million, representing a minimum of 47% revenue growth.

Its scalable business model should continue to grow profits over time, and SORT also gives it a head start in cookieless ads since Google is expected to eliminate third-party cookies within the next year or two. Meanwhile, Perion should also be able to grow through strategic acquisitions as it did with Vidazoo.

The adtech sector is crowded, and there are a number of publicly traded companies to choose from, but Perion is taking a unique approach. Most adtech companies either serve advertising brands as a demand-side platform (DSP) or for the publishers as a supply-side platform. Perion, on the other hand, connects buyers and sellers, meaning it doesn't directly compete with adtech companies like Trade Desk.

Since the pandemic started, the company has consistently delivered strong growth and top and bottom lines and now trades at a price-to-earnings ratio of less than 15. Wall Street seems skeptical that the company can maintain this growth trajectory, but the Q2 results were a reminder that it's able to deliver solid growth in a difficult environment.

Given its revenue guidance, the company doesn't seem to be seeing any headwinds from the current macroeconomic climate. If it continues to grow at the current rate, Perion should eventually be rewarded by the market.