There’s plenty to love about medical imaging software powerhouse Promedicus (ASX:PME).

A founder led, highly profitable disruptor in a large and fast growing market, the business enjoys potent network effects and high switching costs. The balance sheet is rock-solid, costs are well managed and the business should continue to scale well as sales rocket higher. Just look at these mouth watering margins:

Source: May 2019 investor presnentation

Given the structural change within the industry, which is still in the early stages, and the business’ clear dominance, there’s still a long way to run. And given the extremely defensive nature of revenues, the business is about as recession proof as you can get. Heck, you can even throw in the current hotness of AI, which in this case is more than just hype.

Yes, Promedicus sure does tick a lot of boxes. All except one…


Following the latest surge in price, shares now sit at roughly 70 times forecast sales for FY2019. The forward PE is around 182! (For context, the long-term market average is around 16.)

Of course, sales are growing rapidly — likely around 40%-plus for FY2019 — and we’ve already seen how the strong operating leverage is causing margins to explode. Promedicus should be able to sustain high rates of growth for a good while yet; analysts are assuming top-line growth of at least 25% per annum over the next 5 years.

Being too fussy on price for high-quality, fast growing companies is a definite mistake. Nevertheless, no business is worth an infinite amount and therefore, by definition, it is entirely possible to pay too much and achieve disappointing returns — or even losses — despite continued strength in the underlying business.

The global imaging market is worth around US$2 billion, and is growing fast. If Promedicus ends up with the lion’s share, and maintains strong operating margins, then the it’s possible to make an argument for value. But there’s very little margin for error.

Promedicus has been a longtime favourite in the Strawman community, but has dropped down the rankings in recent times on concerns over the valuation. Now ranked at #40, shares currently sit almost 30% above the consensus valuation.

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