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Shares of PubMatic (NASDAQ: PUBM) were near the top of the leaderboard this week as the supply-side adtech stock impressed investors with its third-quarter earnings report.

The news came as the company has struggled to deliver growth during a weak period in the digital advertising industry, but recent results show that those headwinds seem to be fading, as its fourth-quarter guidance called for a return to modest revenue growth.

As a result, PubMatic stock was up 23% as of 12:55 p.m. ET, according to data from S&P Global Market Intelligence.

Image source: Getty Images.

PubMatic hops over a low bar

It’s hard to say that PubMatic had a good third quarter, but stock movements are all about performance versus expectations, and the company was able to overcome a low bar. PubMatic is a supply-side or sell-side platform (SSP), meaning it helps online publishers optimize their ad inventory.

In the third quarter, PubMatic reported revenue of $63.7 million, down 1% from a year ago, which was well ahead of the consensus at $59.5 million. The company credited growth from its supply path optimization (SPO) program, which makes ad transactions more efficient, and said that SPO drove 45% of the company’s activity in the quarter.

Elsewhere, revenue from Connected TV was up 5% sequentially, but down 3% from the quarter a year ago. Dollar-based net retention was 97%, showing that spending from existing customers was down 3% over the last four quarters.

Profits also shrunk in the quarter, with adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) falling from $25.1 million to $18.2 million, and adjusted earnings per share fell from $0.21 to $0.14, which was well ahead of estimates at a loss per share of $0.05.

CEO Rajeev Goel said the company hit an inflection point in the third quarter, adding: “Our innovation investments are driving momentum in the business and fueling our growth expectations for the fourth quarter. In the third quarter, we added new logos, strengthened publisher and buyer relationships, and expanded our offerings.”

Growth is around the corner

Looking ahead to the fourth quarter, PubMatic expects a return to revenue growth, forecasting revenue of $76 million-$80 million, or 5% revenue growth at the midpoint, which was better than the analyst consensus at $74.4 million. It also expects adjusted EBITDA of $32 million-$35 million, which is up slightly at the midpoint from $32.6 million in the quarter a year ago.

PubMatic stock is still down around 80% from its pandemic-era peak, meaning the stock has gotten cheap enough to rebound on signs of a return to growth. If that momentum continues, the stock should keep climbing.

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Jeremy Bowman has positions in PubMatic. The Motley Fool has positions in and recommends PubMatic. The Motley Fool has a disclosure policy.

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