@Solvetheriddle agree totally.

Ultimately, my approach to valuation is “if I never sell, what is the value of the cash I expect to receive over the long run.” And what do I have to believe in terms of revenues, margins, capex, market, competition etc. That’s my North Star. I fully recognise that other investors purchase shares on a different basis altogether. For many, it appears, that just having the SP going from bottom left to top right is enough. But that has a zero connection to my basis for investing. I’m not saying they won’t make money. Just that that”s not me.

And therefore many investors will be willing to pay up a lot more than me, sometimes, or even often.

Your point on $PME about US contracts moving the SP is spot on. That can’t be right (fundamentally) unless they indicate the US is becoming significantly bigger than is assumed. Which as far as I know, it isn’t. The valuation assumes global market dominance. So we need to see big contracts ex-US.

So, on fundamentals, I think, the valuation assumes $PME likely has to evolve beyond imaging at some stage. But I have no reason to put that in my base case or upside case. It would be an artefact to make my valuation justify the SP. I try not to do that.

So, if you are “bottom left to top right” investor, $PME is a “BUY”. But it you are valuing the cash stream you expect to receive by holding it forever, I think it is a “SELL”.

There are many other opportunities on the ASX. So I’ll happily just keep looking for the ones where I believe the SP is less than I am confident the company is worth.

I was watching a recent interview with Howard Marks, where he said the best way to achieve horrible returns over the long term in investing in equities, is to buy businesses when they are overvalued because everyone is hyped about them. Even quality firms.

I'll just say the power of passive funds is too strong and sometimes not worth wasting time thinking about valuation when they have already jumped in earlier than you can say "buy"

@edgescape that may be true, but as a long term investor, I also know that tides change direction over time when your time horizon is many years.

I think it is also fair to say that the higher the tide runs in the flood, the harder it runs on the ebb.

When I buy a stock I am prepared (usually) to hold it forever, so that I will at minimum receive the free cash flows the business generates. That way, it doesn't matter to me which way the tide is flowing.

Of course, the tide influences my psychology and also my conviction. It is easy to believe your analysis when you are flowing with the tide. It harder when you are against it. After all, can I really believe that I am right and everyone else is wrong?

@mikebrisy

As someone once told me, don't lecture stupid people.

And passive funds are analogous to stupid people

There are better opportunities than PME, WES ... and even the ASX as a whole and that much I can agree.

From here PME probably needs to become the de facto industry standard to justify its current valuation, which I think it has a chance of being.

Just 7 % of a growing market and lots of adjacencies to plunder.

Bear Points

Sentiment (like the force) is strong in this one so everyone who wants to own it probably does now and it's hard to see where the marginal buyers will come from beyond the index algos and some year end window dressing.

They have fat margins that will be a magnet for competitors and I don't think the network effects are strong enough to make this a winner takes all market. On the flip side they are years ahead of their competition and Sam thinks this gap is widening.

They have also probably had most of the margin expansion they're likely to see so share price rises are dependent on faster or longer duration growth and multiple expansion, hard to see much more of the latter but I've thought that for a while.

PME has effectively had their part of the market to themselves - hence the high growth at high margins, but if this were to change, that multiple could drop a long way.

I've been trimming from $200 so now down to a much smaller position - every decision to sell this along the way has been a mistake - with the benefit of hindsight...

Disc: Held (residual position)

One point in favour of additional marginal buyers is interest from overseas. That is a wide and deep pool of capital, and the company is still largely undiscovered by overseas fundies with a global mandate, though they are going to be paying a very steep price for a piece of it of course.

Everyone talks about PME being expensive

But what about Dropsuite which happens to be the most popular in Strawman?

Everyone complains about PME being expensive and then many here go and buy DSE which has a similar PE.

What's the thesis behind buying DSE over PME?

I think I'll choose PME over DSE any day :)

On a PE basis you're right @edgescape, but I'd argue DSE is investing heavily in growth initiatives, which is suppressing current earnings. So it's net margins are very low, but promedicus, which is a more mature company has much higher net margins (~50%!, and probably not far from where they will stabilise at). DSE is at 2.8% net margins currently, but that *should* improve as they achieve some operating leverage.

Another way to look at it is by comparing price to sales. DSE is about 5.5x, PME is ~130x. And PME is a MUCH bigger company.

So neither is cheap by traditional measures, but there's a bit of nuance here.

(Also DSE is ranked #25, not #1. Make sure you have 'premium only toggle set to on on the company page)

That's my take anyway, let us know if I've missed something.

@Strawman

Thanks for clarifying

I didn't say that DSE is the top stock but it feels like it is the more popular stock than others as it gets the most activity here with all the meetings and discussions.

With DSE there is also the question of product transparency and whether or not research spending will pay off and become a key differentiator against other players. Microsoft for instance will always do whatever it takes as well and most if not all cloud players have the infrastructure and know how to create resilience in their service.

It was also a bad decision for me agreeing on the sell call here at 40 dollars when I should have bought.

Absolutely @edgescape. Their multiple is only justified if they can materially accelerate profit growth.

Although, I guess my point is that that is equally (if not more) true for PME.

Still, I do think PME is by far the superior business.

Well said.

Best explanation I've heard in a while and couldn't agree more.

@edgescape good observation. I know Hyperion hold a large percentage of PME and if they trim their position size the share price could drift lower.

I see PME down 9% on no news today. It’s a wild ride for a market cap of that size.

PME wasn't the only growth darling selling off today, though it sold off in a more outsized manner probably because of its more egregious valuation. Typical profit-taking/rotation I think, though who knows how long it will go on for?