ASX growth stocks: Can Pro Medicus continue its parabolic run?

I'm on a mission to take a deep dive into some of the ASX's most compelling growth stories. The aim is to provide readers with the key data points and forecasts to make more informed decisions. Today, we're reviewing one of the market's most formidable and popular growth names – Pro Medicus.

Pro Medicus (ASX: PME) has established itself as one of the market's standout growth stories, boasting a compound annual net profit growth rate of approximately 38% over the past decade.

However, this level of consistency and ability to exceed market expectations comes at a steep price. The stock has rallied 187% in the past twelve months and now trades at a record price-to-earnings of 335 compared to 138 a year ago and its ten-year average of 99. For potential investors, the price chart adds another layer of hesitation.

Pro Medicus five-year price chart (Source: TradingView)

Here we are – One of the market's best and most reliable growth stories is trading at its highest valuation on record, with a bubble-like price chart. Can Pro Medicus sustain its parabolic rise in 2025, or is it just one disappointing announcement away from a sharp correction?

Pro Medicus 101

Pro Medicus is a healthcare IT company that specialises in developing and supplying medical imaging software and services. Its key products include:

1. Visage RIS: A Radiology Information System for practice management, training, and professional services

2. Visage 7: Advanced healthcare imaging software that allows radiologists and clinicians to view 2D, 3D, and 4D medical images

Pro Medicus operates globally, with a presence in Australia, North America, and Europe. However, its key market at the moment is North America, particularly the United States. In FY24, more than 80% of its Visage RIS and Visage 7 revenues came from North American customers.

Recent earnings

Pro Medicus shares surged 8% on the day of its FY24 results (14 August 2024). The key numbers include:

• Revenue up 29.3% to $161.5 million, in-line with consensus

• EBIT margins up 230bps to 69.5%

• Net profit up 36.5% to $82.8 million, 4.5% beat vs consensus

• Cash at bank up 27.9% to $155.4 million

• Final dividend of 22 cents per share

• Total dividend for FY24 up 33% to 40 cents per share

Beyond the numbers, the company's earnings call offered valuable insights into its growth trajectory.

• Customer pipeline: "Our pipeline going forward continues to grow strongly ... We have had increasing number of inbound RFPs ... we see that cadence increasing further." – CEO Sam Hupert

• New markets: "We are looking at some new geographic markets. But I think our main focus is currently the US simply because we have so much runway there, and we are making very significant inroads." – CEO Sam Hupert

• Zero lost contracts in the past year: "Yeah. So the answer to the first one is, no, we haven't lost anybody. So our retention rate is 100%." – CEO Sam Hupert

Analyst outlook

On 11 December 2024, Goldman Sachs reaffirmed a BUY rating for the stock with a $278 target price. "We remain positive on the PME equity story as one of Australia’s best global growth companies," the report said.

Ratings aside, the analysts modelled the following near-term numbers:

Source: Goldman Sachs Research (December 2024)

The three-year compound average growth rates (FY24-27) stands at an impressive 29.6% for revenue, 31.1% for EBITDA and 31.6% for net income.

What's equally as impressive is the fact that as Pro Medicus gathers more size and customers, the company's EBITDA margins are forecast to continue ticking higher from 74.4% in FY24 to 77.0% by FY27.

The challenge here is that Pro Medicus is still trading at a price-to-earnings of approximately 143x on FY27e earnings. Even if the company delivers over the next couple of years – Its valuation will remain eye-watering.

Old vs new models

Pro Medicus has a solid track record of beating analyst expectations, resulting in upward revisions to forecast earnings.

For example, the below table refers to Goldman's forecasts as of 26 September 2023.

Source: Goldman Sachs Research (September 2023)

Between the December 2024 and September 2023 models, the analysts have upgraded FY25 and FY26 net income forecasts by 4.1% and 20.8% respectively.

CEO selldowns and shallow pullbacks

On 4 December 2024, co-founders Dr Sam Hupert and Mr Anthony Hall, sold approximately $513 million worth of shares (or 1 million shares each). A block trade of such magnitude typically warrants a discount to compensate the buyer for taking on risks such as share price volatility and bearish market perceptions. But this trade was done at zero discount.

"The sale was in response to strong approaches from a number of high-quality funds," the company said in a statement.

Its fascinating to see institutional players willing to buy such a large shareholding at no discount while the stock is trading at its most expensive point in history.

The parabolic rise has been marked by shallow pullbacks, typically no more than 10%. Even during the market turbulence in December – driven by factors like the Fed's dovish rate outlook and soaring bond yields – Pro Medicus shares only dipped about 9% before rebounding to new all-time highs.

Pro Medicus price chart (Source: TradingView)

The risks

In addition to broader macro risks such as a resurgence in inflation, prolonged higher interest rates, and slowing economic growth, one of the company's most significant challenges is the potential to fall short of earnings expectations.

During February reporting season 2024, the company reported 1H24 net profit growth of 33.3% to $36.3 million. The market was expecting $38.6 million or a miss of 5.9%. The stock tumbled 13.0% on the day of the result (15 Feb 2024) and fell another 7.2% in the next session. It took the stock around two months to return to pre-result levels.

Pro Medicus price chart (Source: TradingView)