Buy, hold, sell? Why investors are divided by Pro Medicus' share price wobbles

Shares in growth, tech, and risk bellwether Pro Medicus (ASX: PME) have cratered 32% since it hit a record high of $298.35 on February 19, revealing itself as a share market legend on the back of a 300-fold rise in just over 10 years. 

The medical software group ticks the boxes for risk-on investors of gangbuster earnings growth, growing margins, a strong balance sheet, capital light model, market-leading position, and a huge addressable market. 

But, the stock's valuation is highly divisive. 

Livewire spoke to OG Pro Medicus apostle Claude Walker for the bull case, alongside top-performing small-cap fundie and valuation sceptic Luke Laretive for the bears.

 

Still bullish

Walker, who runs small-cap research service A Rich Life, says Pro Medicus shares were "ridiculously expensive" above $250, but the dramatic six-week retreat to $204 leaves them "optimistically priced".

For the six months to December 31, Pro Medicus earned 49.5 cents per share and analysts' consensus is for earnings to rise to $1.06 per share for the 12 months to June 30, which places the stock on a 192x price-to-forward-earnings (PE) multiple at $204 per share.

"The way to justify the PE ratio is to assume PME will be able to use its platform to monetise AI algorithims for radiology," says Walker. 

"But at a certain point the share price gets low enough where you no longer have to make that assumption. Now, I'd say it's above fair value, but if you always sell a stock when it's overvalued you'll never get a 200-bagger. So water your flowers, and don't pull them out is the lesson."

Bears unimpressed

Other professional investors, such as small-cap fundie Luke Laretive of Seneca Financial dismiss the idea you should buy-the-dip on Pro Medicus.

"It's just another example of where everyone has positive views about a company, but if you pay 200 times earnings you need above consensus views on addressable market, peak market penetration, speed of penetration, competition, and regulation," says Laretive.  

"Consensus is already very rosy and it's still priced in. So for us, avoiding these fundie favourites and maintaining valuation discipline is a key driver of success."

Professional and retail investors, along with index-tracking funds, have piled into the stock over the last couple of years as management announced a series of large contract wins with market-leading healthcare providers in the lucrative US market. 

The profit and sales growth certainty underpinned by the contract wins is what underpins the bull case, with analysts' median forecasts penciling in earnings per share to grow around 29% in financial year 2026, to $1.38, and 26.5% in financial year 2027, to $1.89. 

Dividends are forecast to climb to 69.5 cents per share, which means today's buyers could expect to earn a yield of 0.34% in financial 2026 on a one-year forward PE of 148. 

"The price to-earnings is still a little bit too high, but if success comes it will justify it," says Walker. 

"It won a lot of big contracts towards the end of last year, so the news flow was good it and got to the point where it should be added to the ASX 50. 

"Then you had the additional demand from passive funds and global ETFs as it's a big company now, and half the stock's still locked up by the founders. Then the short sellers had to cover so it pushed to ridiculous highs, far ahead of itself."

The stock picker also shrugged off the nosebleed annualised price-to-sales ratio of 108x given Pro Medicus boasted best-in-class earnings before interest and tax (EBIT) margins of 72% over the six months to December 31.   

"Price to sales comparables don't work so well with it, as the EBIT margins are so exceptionally high," Walker says. 

"I thought the margins would stop increasing a long time ago, it's surprised me how they demonstrated operating leverage in a way most software companies don't. And it's always had competition, but continues to be the leader in its field by a substantial margin."

Laretive is unconvinced. His Seneca Australian Small Companies Fund finished number one out of 132 ranked for performance in the ACS Equity Australian Small to Mid Cap Index for the 12 months to February 28, and he says finding tomorrow's winners - not today's - is the key to consistently strong returns. 

"Many professional and DIY investors fall victim to confirmation bias," he warns. "They think what has worked will continue to work. And these growth at any price and I only buy high-quality businesses ideas are what get people in trouble, so we avoid fundie favourites." 

According to TradingView, the 14 sell-side analysts covering the stock have an average price target of $271, although these kind of targets should be taken with a pinch of salt and professional investors will rely on their own forecasts to make decisions. 

On Friday afternoon, Pro Medicus traded down 3.4% to $202.82, with the benchmark S&P/ASX 200 (ASX: XJO) adding 0.3% to 7990 points. 

Based on a 192x profit multiple on estimated earnings of $1.06 per share in financial year 2025 do you think Pro Medicus is a buy, hold, or GTFO at $204? 

Let us know in the comments below.