It's fairly standard software release practice. The 40 stands indeed for the week number, and the last number (.7/.8) stands for 'minor' or bugfix release. So 2020.40 would be a 'major' release, and the .3/.4/.7/.8 should be all 'minor'/bugfix releases with small additions/fixes to the 'major' release without introducing major new functionality.
In most cases there's no need to update to intermediate releases, as you noticed. There will be some kind of compatibility table internally that dictates from which older version you can update directly to the latest. So it's possible that in some scenario you can't go immediately e.g. from 2020.11.1 to 2020.40.8, but need to update to some intermediate version (or multiple versions) in between.
Also, those minor releases will not always be released, e.g. if they fail the internal testing process, that's why e.g. 2020.40.5 may never be out in the wild.
