Can Pro Medicus (ASX: PME) live up to market expectations?

Marc Kennis Marc Kennis, July 28, 2022

Who is Pro Medicus? 

Pro Medicus (ASX: PME) develops and sells picture archiving and communication systems (PACS) and radiology information systems (RIS) in Europe, the United States and Australia to hospitals, diagnostic imaging groups and other health-related entities. 


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PME provides radiologists and clinicians with advanced visualisation capabilities to view multi-dimensional medical images. The company offers its products under Visage brands, which allow for web-based PACS and RIS that make 3D images accessible from any PC without requiring enormous amounts of computer power and memory.  

To learn more about Pro Medicus please read our report on the company in our ASX200 Stocks Down Under publication. 

Let’s start with PME’s chart to see what moved its share price since the Corona Crash. 


Pro Medicus

Pro Medicus, Weekly Chart in Semi-log Scale (Source: Metastock)


❶ PME signs a 7-year, $40m contract with Intermountain Healthcare, a large US-based healthcare provider. (PME signs A$40M – 7-year contract with Intermountain Health) 

❷ The first wave of sell-off in growth stocks on the back of expectations of fast-rising interest rates takes down the share price. 


Fantastic technology 

The advances in medical imaging technology have led to a massive data explosion as more precise images take up a significant amount of computer storage. For example, an optoacoustic breast ultrasound can take up more than 10 GB of computer storage. Pro Medicus’ products use networks of customers’ facilities or cloud services to quickly transfer imaging data to a specific office or computer. These features became particularly important during COVID-19 when doctors were forced to work from home. 

PME’s contract with Intermountain Healthcare boosted the already bullish sentiment on the stock to push its share price to an all-time high of $70 in August 2021. Adding a large US healthcare provider to Pro Medicus’ customer base raised expectations of broader adoption of the Visage technology platform and faster earnings growth. 


The bubble in growth tech has burst 

The bubble created in growth technology stocks on the back of near-zero interest rates during the pandemic started to burst at the beginning of 2022 as soaring inflation raised expectations of a much faster than earlier expected rise in interest rates, which led to a revaluation of PME stock. However, we believe this revaluation isn’t completed yet. 


Pro Medicus’ current valuation multiples are very high 

PME is currently trading at a forward P/E multiple of 115.1x, which reflects a huge growth premium in the stock’s valuation. Based on consensus analysts’ estimates, PME is trading at EV/EBITDA multiples of 73.1x, 59x and 47x for FY22, FY23 and FY24 respectively.  

However, EBITDA is expected to grow by 20% in FY23 and FY24, which suggests to us that PME’s EV/EBITDA multiples are too high! 

PME’s EBITDA rose by almost 20% in both FY21 and FY22 as well. However, we think that the expectation of continuous EBITDA growth of 20% four years in a row may be too optimistic as growth rates typically slow down as revenues increase, simply because the comparison base becomes increasingly higher. 


Valuation leaves very little room to disappoint 

A major risk with high valuation multiples, like those of PME, in a rising interest rate environment is that a stock’s share price usually becomes very sensitive to the business’ growth rates. So, as interest rates are expected to rise for the foreseeable future, the risks of bigger hits to PME’s share price in case of missing growth expectations increases. 


Risks of competitors 

Given that Pro Medicus is essentially a SaaS company (Software-as-a-Service), its operations have a very high gross profit margin of 90%+ and an EBITDA margin of more than 60%. Although these numbers are lucrative, they could attract more competition. Pro Medicus’ business has low barriers to entry as it’s not capital intensive or protected by patents. We think these risks require a discount to PME’s future income streams. 


A strong resistance at $50 

PME’s share price broke below $50.00 (the blue line on the chart) in the tech crunch of 2022 and several attempts to break above this level in the last few months have failed. This makes $50.00 an important resistance level for PME’s share price. 


A potential downside to $36 

In the absence of any surprises in the company’s business activities, from a technical analysis perspective, the share price is expected to drag lower under its own weight to 61.8% Fibonacci retracement at $36. However, Pro Medicus is buying back its share on the market, which significantly slows down this process. 

A break above the $50 resistance level would signal substantial bullish sentiment on the stock and it opens the way up to higher levels. 


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