Pro Medicus (ASX:PME) Down 16% on a Great Result, Here’s Why

A Premium Multiple Leaves No Room for “Good”

Pro Medicus fell 16% despite what, on the surface, looked like an exceptional half yearly result. A lot of investors will be asking the obvious question: how can a company print a strong result and still get sold off that hard?

The core principle here is asset pricing. It’s not just about whether the result was “good”. It’s about whether it was good relative to the expectations already embedded in the share price.

And the valuation metrics tell you exactly how high that bar was. Pro Medicus has been trading at roughly 110x forward P/E and around 77x EV to EBITDA. Numbers like that basically say the market is already pricing in years of exceptional execution. When a stock is valued like that, “strong” often isn’t enough. The result has to be strong enough to beat the growth trajectory investors were already assuming.

One other important detail is what sat inside the statutory profit line. Profit after tax jumped materially, but a meaningful contributor was an investment of $10m in 4DMedical that produced an unrealised gain of $150m.

That’s not the normal operating engine of the business. So while the headline profit number looked huge, investors quickly strip that out and refocus on the underlying run rate, the forward guidance implied by the result, and whether the core growth story is still accelerating fast enough to justify the premium multiple.

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A Great Company, A Demanding Price, A Volatile Tape

What was genuinely strong about this result is that the core business is still compounding at a high double digit pace.

Revenue grew 28% to $124m, and underlying EBIT rose 29% to $90m. That implies an EBIT margin of 72%, which is an exceptionally strong outcome for any software business, especially at this scale.

For Pro Medicus, underlying EBIT is the cleanest read on operating performance. Profit after tax, on the other hand, was inflated by the 4DMedical mark to market gain, so I would treat the statutory profit line with a bit of caution when assessing the underlying engine.

On the growth pipeline, the company also reported 7 new contract wins totalling more than $280m. They also stated forward revenue of more than $1,080m over 5 years, assuming key contracts up for renewal are renewed.

That framing is important, because it helps explain why the market has been willing to pay such high forward multiples. When you have a large contracted backlog and long duration revenue visibility, the market tends to capitalise that stream aggressively.

The 4DMedical Gain Inflated Profit, The Core Engine Matters More

The 4DMedical piece is worth separating out entirely. Pro Medicus made a $10m hybrid investment in 4DMedical, combining debt and equity, with a 2 year term and a $20m payout if the share price doubled. The share price has done more than that, which is what drove the large unrealised gain.

That uplift is fair value accounting. It can flow through statutory profit even though it’s not core software earnings.

So the right way to frame it is simple. Treat the 4DMedical gain as non operating and potentially volatile, unless it is ultimately realised in cash later. The real story in this result is still the core software growth rate, the margin profile, and the durability of the forward contracted revenue.

The investor’s takeaway for PME

Even after a 56% drop from the high, the market is still pricing a meaningful premium for growth.

To justify a multiple like this, investors are implicitly underwriting three things:

First, Pro Medicus has to keep landing large enterprise contracts and keep renewals strong, meaning retention stays very high.

Second, it needs to keep expanding wallet share across the installed base, so it is not just winning logos, it is deepening penetration with full stack adoption (including archive and cardiology).

Third, it has to preserve the operating margin structure as it scales. At these margins, even small signs of dilution can matter a lot to valuation.

The backlog is the anchor here. With more than $1.0bn of forward revenue visibility over the next 5 years (subject to renewals), the market is effectively capitalising that contracted stream at a premium.

My base case, and the most reasonable one in my view, is:

Backlog converts as expected, renewals remain strong, but growth gradually decelerates into the low 20%s over time.

Under that scenario, you can still see why the stock screens expensive even after the sell off:

Forward EV/EBITDA: ~40x to 60x
Forward P/E: ~55x to 85x

So despite the drawdown, the market is still paying up for a very specific outcome, and there’s less margin for error than many people assume.

That’s why, at these levels, I would frame it as a hold. The business quality is clear, but the valuation is still demanding, and you need continued execution on all three pillars for the upside case to reassert itself.