Digital performance marketing services provider XL Media (LSE: XLM) was admitted to the AIM market in March 2014. The shares declined for most of that year reaching 39p or so by December. Since then, the trajectory has been up, driven by some hefty double-digit increases in earnings per share.

Today, XL media shares change hands around 100p. The momentum seems strong and I can’t ignore the firm any longer.

Trading is brisk

Last month’s interim report revealed revenues up 39% on the equivalent period the year before and pre-tax profit 20% higher. The company is delivering real financial progress from its business niche and the directors are confident of further progress,  lifting the dividend by 47%.

XL Media’s chief executive, Ory Weihs, sees plenty of opportunities to drive growth ahead and reckons a new subsidiary will  “lead the group’s development in this important territory, with a key focus being mobile applications marketing.”  The firm’s analysis suggests that US mobile advertising growth is accelerating, so the territory could be a source of further progress for the company down the line.

City analysts following the firm expect earnings to balloon by 24% this year and they see a 7% uplift during 2017. Meanwhile, after raising funds from the market on admission to the AIM market, and good trading since, XL Media carries no debt and sits on a handy pile of cash. 

A modest valuation for a reason?

Considering such attractive qualities we might expect the firm’s valuation to be higher than it is. The forward price-to-earnings (P/E) runs at around 9.5 for 2017 and there’s a forward dividend yield of 5.7%. Those increased earnings should cover the payout almost twice.

XL Media seems to be growing fast but I wonder whether the firm’s narrow niche keeps the valuation modest. Operations centre around attracting paying users from different online channels and directing them to online gambling operators. Although the business is performing well now, there’s likely to be a large element of cyclicality in the firm’s operations and any  sustained economic slump that might be ahead may hurt business.

It’s interesting to compare XL Media with its larger peer from the wider media sector FTSE 100 stalwart Pearson (PSON), which has a publishing business focused on education. Pearson’s share price has eased by around 45% since the beginning of 2015 and the firm’s earnings have been more volatile than XL Media’s.

Pearson does have its attractions, though. The firm’s business seems broader in scope and the company’s valuation seems modest. The forward P/E ratio runs at just under 13 for 2017 and there’s a forward dividend yield of 6.3%, although the payout is only covered a little over once by predicted earnings.

Like XL media, I reckon Pearson is vulnerable to cyclical pressures and business could turn down if the macroeconomic outlook deteriorates.

A growth opportunity

XL Media's trading niche continues to deliver positive momentum for the business and the shares, which looks set to continue for the time being. 

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Kevin Godbold has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.