Good stuff @Solvetheriddle! I know you’re busy on preparing your presentation for tomorrow, but I would be keen to see your updated valuation where you might add more when you have time to come back to it. I’m just throwing this valuation out there to conjure up some Strawman opinions and value consensus. I’m assuming you are interested in adding somewhere north of $150?

@Rick and @Solvetheriddle totally agree that DCF with a long time horizon is the only sensible way to value $PME, and I agree with @Solvetheriddle that you have to throw the kitchen sink at it to get outcomes of $150 to $200.

The problem is that such a profitable business and margins is bound to attract competition, eventually, so with what confidence and for how long can you extrapolate margins like that?

If we get Market Trump Tariffs Tantrum 2.0 (Greenland / Europe), might the quality tech sell off put it into the zone? I am salivating at the prospect, and am turning my mind to how much cash I can rustle up.

While I agree with a lot of what you’ve written @Rick, PME’s charts will look like a continuous mathematical progression, until they don’t. Can it innovate to sustain that momentum?

I’d probably considering nibbling sub-$180.

Nice @mikebrisy. I agree. PME has been almost flawless in its execution to date and this can only continue for a limited time. Margins and ROE will eventually decline with maturity and competition and there is execution risk to consider.

To make things interesting I looked at what earnings would be in 5 years time if the business were to reinvest 50% of its earnings at 50% return on equity (with ChatGPT’s help). The result is earnings of $1.86 in year 5. At $186 per share that represents a PE of 100 in 5 years time. This ignores dividend income received over the next 5 years that could also be reinvested. Interesting!

Here is ChatGPT’s response:

“Let’s lay it out step-by-step and be clear about what “earnings” means.

Given

• Starting shareholder equity: $1.52
• ROE: 50% per year
• Reinvestment (retention) ratio: 50%
• Time horizon: 5 years

1. Growth in equity

Only the retained earnings grow equity.

\text{Equity growth rate} = \text{ROE} \times \text{Retention} = 50\% \times 50\% = 25\%

So equity compounds at 25% per year.

\text{Equity after 5 years} = 1.52 \times 1.25^5 \approx 1.52 \times 3.0518 \approx \mathbf{4.64}

2. Earnings in year 5 Years

Annual earnings are:

\text{Earnings} = \text{ROE} \times \text{Beginning equity}

Beginning equity in year 5 is equity after 4 years:

1.52 \times 1.25^4 = 1.52 \times 2.4414 \approx 3.71

\text{Year-5 earnings} = 50\% \times 3.71 \approx \mathbf{1.86}

3. (Optional) Earnings by year

✅ Final Answer

• Equity after 5 years: ≈ $4.64
• Annual earnings in year 5: ≈ $1.86
• Equity is compounding at 25% per year due to 50% reinvestment at 50% ROE

This is a textbook example of a high-quality compounding business.

@Rick lol, no im not working on a preso for tomorrow, just see where AP wants to take it, the "40-year" post had a lot in it, my biggest position, TSMC, reported FY25 so i am looking at that--closely. Someone at the ASA asked me if i would ever buy PME, in theory, yes definitely, in practice, probably not. If it gets to my buy levels, likely there has been a big market-moving event, and there will be plenty of other opportunities. otherwise PME falls due to competition or big stock-specific issues, then hmmm watch out. But I will have another look post the half-yearly result. PME is just really well loved, is there a bear thesis outside of Valuation?

@Rick since you most recently posted on $PME, I’ve been looking at my valuation, last run after FY24 was in, and which tended to yield values of $150 to $200 on a long horizon DCF, with a WACC of 10%.

What was interesting is just how much stronger the FY25 result was compared to my model, but on closer examination, the results held an unusually large spread between revenue growth (high) and Opex growth (low). This I think reinforced some of the toppier analyst predictions and valuations of >$300, which I don’t buy, as I don’t see that as able to be sustained.

Developments since I last looked at this one include news of cardiology and pathology modules which expand the TAM and, maybe more importantly, give $PME access to tender lists in the US which require "one-stop shop" offerings and from which they have hitherto been excluded.

Interesting also is that renewal values are coming in close to 2x, and there were no non-renewals last year, which makes for a pretty impressive NRR. Also, the global shortage of radiologists and the potential for PME to use ML and AI to drive workflow productivity leveraging an unrivalled captive dataset sees me adding to my thesis that the owners of data and process workflow will be the AI winners.

While they say they are at a market share in radiology and PACS in US of c 10%, globally I have them them only at around 5% of their expanded TAM, and under my various scenarios for growth for another 10 years, that still puts them at only 10% to 15% globally in 2035, given that the market is still expanding rapidly (12% CAGR at the mo.). Not unreasonable for a global market leader.

All that to say, my aggressive (but still reasonably comfortable) scenarios now generate a range of values from c$150 up to $270, albeit the upper end requiring 3 more years of revenue growth at 30%.

Time and again, I’ve failed to dip a toe in the water with this one, and so today I scratched the itch with a small buy of 2.8% at $186. (I was going to hang out for $180, but thought better of it!) Hopefully the quality growth sell off continues to drag it lower before the result in Feb, in which case I’ll happily add more.

I’ll publish my own valuation after results are in. For now, I’m happy to like your of $180, albeit I think I am now well north of that.

Disc: Held (2.8% RL)

Thanks @mikebrisy. Some great research in that post! I had also been looking at TAM and market share and concluded they still have a long runway of growth ahead. I agree 5% of TAM (global) and then TAM itself growing at 2 to 3% per year. The revenue is still growing strongly and margins still improving.

That leaves the question of competition and moat? Their strategy includes leveraging R&D into new generational products. I haven’t done a deep dive into the risk of competition yet.

I like your definition of “dipping a toe in” as 2.8% of your portfolio! Is that your “Big Toe”? :D I’ve been purposely trying to hold myself back on the ASX tech stocks while the knife is still falling. I am nibbling at PME, WTC, XRO, TNE and CAT. My weakness is diving in too quickly on a falling knife. I’ve discovered lately that buying small lots each day is enough to satisfy my urge to jump in without moving the needle too much. That’s my rehab strategy! :D I need to put a big sign up in front of me “Buy Slow and Sell Even Slower”. :D

@Rick I get your point about falling knives, but I've lost count of the times I've waited too long to get a piece of $PME and then the reboud has happended too quickly, so I'm more than happy to enter a little too quickly, if I can see the value. If the SP tanks a further 10%, 20% or 30% over the coming months, I'll simply be adding more to take my total position up to 10%.

While we're on the topic of ASX tech selloff, will today be the day that I get the chance to add more to $TNE, after NASDAQ's fall last night? Fingers crossed.

On growth in North American TAM, the 3% mentioned by $PME is the number of scans. The relevant TAM growth is actually in the software spend, which is much higher. According to some research reports, I've pulled out the following estimates for CAGRs to 2030:

• Enterprise Imaging IT: 12.2% CAGR (2025–2030)
• Radiology Information Systems (RIS): 9.78% CAGR (2024–2030)
• Cardiology Information System: 9.2% CAGR (2025–2030)
• Digital Pathology: 13.5% CAGR (2025–2030)

These are global numbers, with CAGRs for North America typically 2-3% lower.

So if you think about the next 5 years, with Software TAM growing c. 10% annually, and with an industry-leading product, there is a pretty solid floor of 20% annual revenue growth under $PME, albeit I expect them to do significantly better than that.

There are several reasons why these growth numbers are so high. First, sales in imaging software over the last 20-30 years, have been dominated by the software provided by equipment vendors. The "replacement cycle" both for software and hardware has provided a tailwind that has only really started to blow over the last 10 years, and it has a lot further to run. We are still relatively early in the switch to vendor-neutral solutions that address the total workflow, e.g., for radiology. Moreover, the US has been an early adopter of cloud-based solutions in healthcare, with Europe lagging, and there is still vast future potential in Asia, given the investment in healthcare in middle income countries.

So, by 2030, integrated vendor neutral solutions will be well-established as the norm - certainly in North America and a few other countries, but RoW will still be playing catchup. Importantly, by that time, my thesis is that $PME's products will be clear market leaders. Even though the TAM CAGR will slow (perhaps to 5-8% globally), $PME's brand dominance will mean that it continues to capture more than its fair share of the market opportunity, while RoW will still be catching up. So, we could "easily" see that in the period 2030-2035 that revenue growth of 20%+ is maintained, even as $PME's global market share remains <15%.

So, this is indeed a bullish thesis, and it does not address competition. And absolutely disruption or a strong new competitor could absolutely blow the thesis out of the water and lead to a rapid re-rating. So while I am bullish on $PME, I am not complacent, and as I (hopefully) build a material position, I will be sure to monitor the market. I would certainly sell if a credible threat emerges.

Of course, the fact that I have taken an initial position almost guarantees that he SP is going to call another 20% ;-). (You're welcome)