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Should you buy this small cap as it surges 15% after beating expectations?

Image: Sky: Fair use

Mobile advertising specialist Taptica (LSE: TAP) is among today’s top risers. Its shares have risen by as much as 15% following a positive trading update. It shows that the company is making good progress and its strategy is working well. However, does this mean now is a good time to buy it? Or, is its valuation now unattractive following such a sharp rise in its share price?

Improving performance

In the last two months of the year, there was better-than-expected growth from the mobile advertising campaigns being run for new and existing clients. This was centred on the Asia Pacific region, with the technology platform performing well. Due to this, Taptica now expects to record revenues for financial year 2016 that are ahead of previous expectations. They’re now forecast to be at least $125m, which represents an increase of 65% compared to the previous year.

In addition, the company’s platform has also been able to deliver operational efficiencies in the campaigns. This means that EBITDA (earnings before interest, tax, depreciation and amortisation) is due to be materially higher than market expectations. It’s expected to be around $25m compared to just $7.4m for the previous year. The company also expects to be cash generative and had a cash balance of $21m as at the end of the 2016 financial year.

Outlook

Taptica is forecast to record a rise in its bottom line of 10% this year, followed by further growth of 11% next year. Despite today’s rise in its share price, it still seems to offer good value for money. For example, it has a price-to-earnings (P/E) ratio of 13.6 which, when combined with its growth outlook equates to a price-to-earnings growth (PEG) ratio of 1.3. This indicates that the company’s share price could continue to rise – especially since its current strategy is performing well.

Sector peers

The outlook for the business is in line with other stocks within the media sector. For example, Sky (LSE: SKY) is expected to report a fall in its bottom line of 9% this year, followed by growth of 18% next year. Of course, Sky is the subject of a takeover attempt at the present time, but Taptica’s performance indicates that it’s holding its own against larger and more diversified peers. This should increase its attractiveness as an investment on a relative basis. While a bid approach may or may not take place, the company has significant growth opportunities in the long run.

Clearly, a sector peer such as Sky has stronger finances and a more stable long-term outlook. However, Taptica may deliver better growth in the coming years thanks in part to its greater adaptability and more nimble business model. While gains of the magnitude of the ones recorded today may not continue, Taptica could be worth buying for the long term and doesn’t appear to be overvalued in the least after today’s share price gains.

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Peter Stephens 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.