By Tess Bennett

After advancing more than 50 per cent in the past six months, shares in medical imaging software business Pro Medicus have reversed direction following its first-half profit miss.

The $10 billion company used the 20 per cent plunge in its valuation as an opportunity to buy back about $2.8 million in stock last week.

Although the stock trades at a sky-high multiple – about 100 times next financial year’s earnings – investors and analysts say the buyback move is a sign the management thinks the shares are undervalued.

Broker Josh Kannourakis, Barrenjoey’s co-head of technology, said that even as some questioned whether buying back the stock at such a high multiple was wise, Pro Medicus added $760 million in value the day after the buyback was activated.

“Its current market cap is $1.2 billion higher than when the buyback started,” Mr Kannourakis said.

On Friday, the shares closed at $98.22, about 9 per cent below their peak.

The bulls are convinced that the stock has further to run and Jefferies’ Wei Sim, who has a $120 price target on Pro Medicus, described “near-term weakness as a good entry point”.

“We agree that PME’s multiple is one which needs to be grown into, but industry checks to understand … [the] cloud competitive landscape has left us more confident of PME’s competitive advantage,” the analyst said.

Pro Medicus chief executive Sam Hupert founded the company with friend Anthony Hall in 1983, selling software to help radiologists manage their practices. Today its core product, Visage, is used by hospitals and radiology clinics to stream medical images to workstations and mobile devices, enabling them to make diagnostic decisions remotely.

The stock, floated in 2000 at $1.15 a piece, has won over investors thanks to Pro Medicus’ dual position as a growth company and a profitable one that pays dividends.

Investors have piled in over the past six months after the company signed a string of big contracts with US healthcare groups, including a 10-year $140 million deal with Texas hospital operator Baylor Scott & White Health.

At such a rich valuation, analysts are wary of missing lofty future growth targets as well as fresh competition from legacy players such as GE Healthcare, Philips, and Siemens. They would have to play catch-up to develop cloud-based software capable of threatening Pro Medicus’ position.

“PME is, in our opinion, years ahead of competitors in terms of its technology and continues to invest to maintain this lead,” Mr Kannourakis said.

Citi has sell recommendation

Citi healthcare analyst Mathieu Chevrier has a sell recommendation on the stock.

“While we expect significant revenue and EPS growth to the end of the decade … the current valuation implies even higher growth, which over time may become more difficult to achieve due to market share/size,” Mr Chevrier wrote.

Tobias Yao, a portfolio manager at Wilson Asset Management, said the founders’ stake – they own 48 per cent of the business – was the key to the bull thesis, giving minority shareholders confidence that the management was focused on the long term.

“Sam Hupert is one of the most impressive technology entrepreneurs in Australia and frankly doesn’t get enough credit for the world-class business that he has created,” Mr Yao said.

WAM topped up its stake in Pro Medicus two years ago when rising interest rates triggered a sell-off in tech stocks.

“We sat together as a team to work out what are the best tech companies to own to effectively ride out what, we thought, could be a pretty tough period. Pro Medicus was top of our list and this has worked out very well for us,” Mr Yao said.

“If you purely look at the operating metrics, Pro Medicus is world-class in terms of sustaining its margins and top-line growth for a long time.

“They have 50 per cent earnings margins while delivering 30 per cent growth, year in, year out.”

Backers say the company’s next wave of growth could come from expanding its target market by selling software to other specialty areas such as cardiology.

Further out, the company has developed an augmented reality app for Apple’s Vision Pro to replace workstations for radiologists examining scans, and is exploring how to cash in on the AI boom in diagnostic software.

“They are on the precipice of a few big things in the industry, so I still think there’s value at the current price,” Mr Yao said.

In comparison to the AI-fuelled rally on Wall Street, analysts and investors say it’s too early to determine how AI could influence Pro Medicus’ valuation.

“At this point in time, it’s difficult to get a sense of how much AI revenues are baked into PME’s valuation, given there are no AI revenues generated by PME as yet,” RBC Capital Markets’ Garry Sherriff said.

Its Visage software “will continue to be the main contributor over the next few years”.

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