Cloud Imaging And AI Adoption Will Drive Long Term Healthcare Platform Dominance

Catalysts

About Pro Medicus

Pro Medicus provides cloud based enterprise imaging software that enables radiologists and other clinicians to view, manage and analyze large medical imaging data sets efficiently.

What are the underlying business or industry changes driving this perspective?

• The continued shift of U.S. health care systems toward large integrated delivery networks and Tier 1 academics, where Pro Medicus is already deeply embedded, supports ongoing contract wins and renewals. This expands high visibility, annuity style transaction revenue and drives sustained earnings growth.
• Rapid growth in imaging data volumes, especially 3D breast imaging and multi modality CT and MRI, is exposing the limitations of legacy compress and send platforms. This should accelerate share gains for the Pro Medicus streaming based cloud solution and support above industry revenue growth and expanding operating margins.
• Rising adoption of full cloud infrastructure in hospitals and imaging networks, combined with the ability of Pro Medicus to run 100 percent in AWS, Azure or GCP, positions the company as a preferred replacement for on premise PACS and archives. This increases average contract values and can boost forward revenue and retained earnings.
• The extension of the Visage 7 code base into cardiology and digital pathology, both delivered as part of the same cloud platform, creates a multi ology growth vector that can be cross sold into an existing blue chip client base and lift transaction volumes. This should compound total revenue and support structurally high EBIT margins.
• The integration of clinically validated AI algorithms and Vision Pro based visualization into the core platform, coupled with new research collaborations, enhances Pro Medicus differentiation and pricing power. This helps maintain premium net margins and supports faster earnings growth as AI usage becomes mainstream in imaging workflows.

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming Pro Medicus's revenue will grow by 29.5% annually over the next 3 years.
• Analysts assume that profit margins will increase from 54.1% today to 58.0% in 3 years time.
• Analysts expect earnings to reach A$268.3 million (and earnings per share of A$2.58) by about December 2028, up from A$115.2 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting A$337.8 million in earnings, and the most bearish expecting A$229.9 million.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 159.2x on those 2028 earnings, down from 212.6x today. This future PE is greater than the current PE for the AU Healthcare Services industry at 65.1x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.79%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Pro Medicus trades on very high expectations for long term growth and industry leading margins, so any slowdown in U.S. hospital and IDN imaging volumes or tightening of health care budgets, for example if post COVID cost cutting and reimbursement changes push buyers toward cheaper alternatives, could compress premium pricing and reduce annuity style transaction revenue growth and future earnings.
• The competitive landscape remains crowded, with large incumbents, cloud based start ups and rapidly evolving AI and digital pathology specialists all investing heavily. If any rival manages to deliver true cloud at scale, close the speed gap, or bundle imaging, cardiology and pathology more cheaply, Pro Medicus could lose future RFPs and renewals, which could pressure long term revenue growth and net margins.
• New growth vectors such as cardiology, digital pathology and AI are still early stage, with unclear market size, adoption pace and pricing. If these nascent markets do not scale as management expects or regulatory hurdles like FDA approvals delay launches, the incremental transaction volumes and product attach rates needed to justify current forward earnings forecasts may not materialize.
• The business is highly concentrated in North America for around 90 percent of revenue and depends on a limited number of very large multi year contracts and renewals. Any unexpected loss, delayed implementation or renegotiation on less favorable terms at a major client like Mayo, Trinity or other Tier 1 academics could materially impact future revenue visibility, EBIT expansion and retained earnings growth.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The analysts have a consensus price target of A$326.49 for Pro Medicus based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of A$350.0, and the most bearish reporting a price target of just A$290.0.
  
• In order for you to agree with the analysts, you'd need to believe that by 2028, revenues will be A$462.4 million, earnings will come to A$268.3 million, and it would be trading on a PE ratio of 159.2x, assuming you use a discount rate of 7.8%.
  
• Given the current share price of A$234.43, the analyst price target of A$326.49 is 28.2% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.