@Solvetheriddle Interestingly, I used your valuation of $82 for PME in McNiven’s formula to see what ROI you might expect as an investor. I assumed current equity of $2.46 per share, ROE of 61.8% and 50% of all future earnings reinvested back into growth. The formula indicates ROI of 8.3% per year paying $82 per share now.

After a decade using this formula I came to the conclusion (a few years ago after selling tech stocks too early) that you needed to treat high growth tech stocks differently. None came close to giving you a 10% ROI (let alone 15%-17% as some stocks indicate) When PME was trading at an all time high, McNiven’s formula indicated your ROI would be about 4%. I assumed the formula didn’t work for businesses like this and started making exceptions (using lower target ROI to value high growth tech).

Currently there are a number of high growth tech stocks indicating ROI of at least 7% using the formula (eg. TNE, WTC, REA, NWL) and they are still heading lower.

Perhaps the formula works better than I concluded and tech businesses have been overvalued by the market for years? Perhaps the Aussie tech crash is purely a case of multiple readjustment after years of over-optimistic, FOMO driven PE creep…or is it the fear of AI driving down the share prices? I don’t know the answer, but it’s starting to make me wonder.

More tech pain coming today with Apple down 5% overnight! Resources are coming off the boil too!

@mikebrisy despite saying all that about PE valuations of high growth tech stocks, I added more PME and TNE shares after market close yesterday. I’m still buying VERY slowly in this market. The sentiment for tech, especially Aussie tech is poor. There’s no discrimination between stocks on the basis of vulnerability to AI. They are nearly all being sold off. Except for CAR perhaps which surprised the market on the upside.

@Rick Yes, I am down to about 5% cash, having been buying pretty much from the start of the year. And I will keep deploying what's left slowly.

If there is a silver lining for me it is that whenever we emerge from this, I will be holding more quality stocks with higher conviction.

In less than a year ago the world was going to fall apart because of tarriffs. Today its AI. Given the decision to be a stockpicker, the worst thing to do is get scared every time there's a new "world is ending" story of the day.

When others are at their most fearful, that's the time to pick up quality. Every time I've failed to do that aggressively enough, and when I've looked back a year down the line, I ask "why didn't I .... ". Well, I didn't do so much at those times because I had the same fear as everyone else.

So, I'm staying invested, allocating more into what I think will be the long term winners, and sticking to my guns.

@mikebrisy I don’t get that “high conviction” buzz everyone talks about.

When I buy stocks I get this feeling of “This appears to be a great business and it is looking like excellent value, but everyone else is dumping it so what am I missing feeling” Then I add more shares cheaper and I get this “what the hell am I doing buying more shares when I’m already down 20%” feeling. Then I just wait and wait and get this “I must have been wrong feeling”. Then finally the shares start to turn and I get this “should I get out now I’m square feeling”, then they double in value and I get this “I’m a genius feeling” when it was probably all just luck!

@Rick about to jump on NCK call, but reivestmnet doesnt work for s/w, where no M&A its all above the line costs, thats why a dcf is better, that's my view, mcnivven needs reinvestment to work. a view in 10 seconds, may come abck to it

@Solvetheriddle @Rick Citi have their finger right on the pulse. PT slashed from $350 to $300. (... walks away sadly, shaking his head.)

At $120 and based on a forecast EPS of $1.51 for FY26 then I have the PE at below 80 times now.

Edit: I've initiated a small position at just under $120.

Barrenjoey has upgraded Pro Medicus to Overweight:

"... a bad day to be a software stock but PME should not have been down 24%. "The 1H26 miss was driven by contract phasing (larger 2H skew), with FY26E B*e revenue unchanged pre-currency adjustments.

FY26E+ EPS revisions (5-12%) are driven by AUDUSD currency adjustments (prior B*e 0.64 vs spot 0.71) and a reduction in margin expansion in outer years.

"Risks to B*e firmly skewed to the upside ex-currency risks and contract catalysts likely in 2H26E. PME is now trading on a PEG ratio of 2.0 in FY27E, a level not seen since the COVID sell-off in March 2020.

"PME remains the highest-quality company within our software universe and, while we think AI disruption risk to the software sector is significant, it is likely to be a beneficiary.

"Upgrade to OW – revised PT of $220ps (prev. $305ps) driven by earnings revisions, Rfr increase to 4.5% (prev. 4.0%) based on B* house assumptions, and slightly higher beta (1.1 from 1.0)."

True. There’s heaps of stuff we condense into a single dimension that’s actually multidimensional. “Conviction” is one of them. For example - Is it conviction of a miss priced probability or conviction around an outcome? Very different things. I can have high conviction of a miss pricing because of a huge payoff if correct, but still be scared buying because my conviction around the outcome is low. It leads us to take the wrong action sometimes. For example making a buy sell decision rather than a position sizing decision.

The answer to low conviction in outcome but high conviction in misspricing is just a small position size.

I can't help but think if one is looking half on half at a company like PME they are probably missing the point!

I did appreciate the commentary around the "threat" from AI that they provided in the Q&A. Far more level headed than doomsday stuff appearing in the media.

@Rick I think revenue of $124.8m missed consensus expectations by about 2-3% and net profit of $171.2m included unrealisedf gains of $149.1m from PME's investment in 4DX.

Interim dividend of 32c also missed Macquarie forecast of 35c

EBIT margins of 73% is incredible.

"Underlying profit before tax rose 30% to $91m (consensus at $100m vs 1H25: $70m), broadly consistent with revenue growth and reflecting continued operating leverage. The slight miss versus consensus appears to have resulted from lower-than-expected operating margins, with consensus forecasting 76% over the period vs 70% actual. For reference margins over 1H25 were 72%"

Outlook

Management expects 2H26 to be stronger, supported by the timing of major implementations (including Trinity cohorts) and recent contract wins scheduled to go live. The pipeline remains broad-based across academic, IDN and private segments, with increasing traction in cardiology.

On AI, management views recent market concerns as overdone, noting Visage 7 is built on proprietary, highly specialised technology that is not easily replicated. AI tools are already being used internally to enhance developer productivity, and in clinical settings are expected to augment rather than replace radiologists, supporting ongoing imaging demand." Lincoln Indicators

@Rick I also added more this morning...If I recall correctly most of these high PE stocks get knocked around (unjustly imo) during reporting season...I've always been of the view that one of the best times to pick up high quality/PE companies that have been traditionally too expensive is the Feb and Aug reporting.

@OxyBBear - here's the headline I pulled off FactSet.

Pro Medicus Posts Fiscal H1 EPS of AU$1.636, Revenue of AU$128.9 Million Vs FactSet Estimate of AU$128.3 Million

@mikebrisy Some differing revenue figures. Another source I use has revenue increased 28% to $125m with consensus at $132m.

Hugely disappointing miss @mikebrisy! ;) Mr Market is off his meds again! ;) Still not screaming cheap though according to McNiven’s Valuation.

@OxyBBear Yes, it depends on the sample set they poll.

marketscreener.com had $128.6m for revenue (n=6).

The "n" value is key because not all covering analysts give a 6-month forecast.

I'm wondering if the inclusion of the $4DX number is throwing out some of the market digestion of the bottom line?

Based on some overnight results from Europe and US, marketing definitely in a "shoot first ask questions later" mode.

I picked up some more at sub-$140. Yay.

A year ago I set out my stall for $PME to be a buy for my in $120-$150. We're solidly there, and with the passage of time, my buy range is now anything below $170.

Sam addressing the "AI-SaaS-mageddon" as I type!

@OxyBBear @mikebrisy according to the announcement 1H26 “underlying profit before tax was $91m (consensus at $100m vs 1H25: $70m)”. I have analyst consensus for FY26 earnings (after tax) of $158 million (13 analysts, Simply Wall Street). Assuming a 30% tax rate NPBT would need to be $226 million to meet current analyst expectations for FY26 earnings. So 2H26 would need to bring in $135 million NPBT to meet market expectations. That would explain the reaction! Do these assumptions look correct to you, including the tax rate?

@Rick yes - I think that's right. I estimate an 8% miss at the EBT line for the half, but didn't write it up yet because I want to look properly at the numbers after the call.

Also some analysts Q&A on margin expansion, less than they were expecting. CFO has explained.

So - yes there is a sizeable miss in there somewhere in the P&L, but revenue trajectory is positive and margins still advancing.

So far Sam is standing up pretty to the grilling he is getting on AI, pricing, tenor of future deals, progress on DoD opportunity, regulatory barriers to AI adoption, impact of AI to reduce transactions flowing through Visage etc. etc.

Sam basically saying on all dimensions, AI seems to offer more tailwinds than headwinds, emphasising that there is still such a load on radiologists that all the technology product improvements are going to help.

Sam also highlighting $PME reputation on execution, citing competitors who are signing contracts that aren't getting implemented, whereas $PME is consistently beating implementation targets.

"The more we put in, the bigger the gap [to the competitiion] is getting."

It is a typically assured, unstated delivery by Sam.

@Rick Confirming I have FY26 NPAT of $158m as well.

I haven't looked forward to the FY26 yet, but have interrogated HY progressions.

To back out the impact of $4DX in the P&L, I've done my own adjustment. PME's tax rate each HY ranges from 28.6% to 30.3%, and was 29.6% this HY, so I've backedout 70% of the contribution of Fair Value Movements in Financial Assets to NPAT and 100% from EBT, to generate the following table:

A few point arise from this:

Revenue:

Management said they think the market might have got ahead on the $170m/10yr Trinity Contract implementation, which only had a minimal 2-month contribution from initial tranches to the 1H result, but will make a more significant contribution to 2H. They spelled out the details by the cohorts/tranches being implemented, with it all to be done by Oct-26 and currrently on track.

So I think revenue is below where some analysts had it, and the number of $124.777 is below the marketscreener.com consensus of $128.7, or -3%.

Note: One of the things to check in reports is whether they track Sales Revenue or Total Revenue (which includes Interest Income). I think FACTSET which I quoted earlier my look at total revenue, whereas marketscreener.com looks at Revenue from Sales.

So, in conclusion it was a 3% revenue miss, and this can be put down to the market not properly reflecting the timing of Trinity implementation.

Opex

I also had a look at the slight % Margin compression (EBIT, EBT, NPAT), and the culprit here is the Employee Benefits Expenses increased in the half to $24.804m, up a whopping 44% from the $17.185m in the PCP.

Exaccerbating this was a lower capitalisation rate (15.4% vs. 18.5% pcp) as well as increased Share-based payments expense (+55%), given fair value of performance rights at time of valuation.

I didn't recall this being discussed on the call, however the following note is in the accounts:

So, this is far and away the biggest step up in Employee costs we've ever seen, and I'll need to go back over the transcript to see if this attracted much discussion. (I had to step away from my desk part way through the call and might have missed the relevant item.)

I find it hard to figure out to what extent the bottom line analysts / consensus forecasts anticipated any contribution from $4DX, as the investment and its basic terms were known.

Overall Conclusion

I think today's PME result is strong - although a minor miss at the revenue line, which can be explained, and a larger miss at the bottom line driven by increased costs.

The management commentary on forwarding looking factors, including a robust and wide-ranging discussion about AI, was confident and well-argued.

At the EBT and NPAT levels, I wonder to what extent the combined factors of i) a slight revenue miss, ii) higher opex growth and iii) a major distortion from the $4DX contribution, has disorientated the market.

And in the current environment for software, we know that anything other than a solid outperformance is going to get punished, and badly.

I am prepared to see through all of this, and see a business very much on track and delivering according to the thesis. Expenses growth is something to keep an eye on, and I've marked this as a flag for future reports.

However, overall, I think a -22% SP markdown on a price already close to the low end of my valuation, is creating an opportunity to go overweight on $PME.

I am a strong BUY today.

Disc: Held (8% RL at time of writing and adding)

@mikebrisy - from memory, there was a mention of the reason for the increased Employee Costs somewhere in the call, in the Q&A I think. As I understood it, the reason was at least in part an increased sales force, and the reference was to a pic of the crew they had at RNSC (or whatever that major show was). It sounded like the new people were performing well on increasing sales out of that conference. Just a few comments in the call, buried somewhere.

Also topping up my RL holding today. First tranche done and waiting to see how much further it might fall.

@Clio thanks ... yes, I was there for the discussion about RNSC and the big team and biggest ever stand and the big set of sales leads coming out of the conference. I didn't join the dots, but will go back over the transcript in detail.

As I expected PME closed near its low (it closed actually at its low) hence why I stated in another post why I hadn't purchased PME yet.

My rule, depending on the extent of the earnings miss and the stock's valuation, is usually to buy on the 3rd day after a downgrade/earnings miss. Having said that, if the stock falls a decent size percentage again tomorrow I will be sorely tempted to purchase some but leaving enough funds to purchase in 3-4 parcels lower down in case we get a crazy market as I am bullish the stock over the long term and don't want to be too cute with my entry price.

I think my main concern is the potential FX headwind as I expect the RBA is not done raising interest rates and resources strength provide a tailwind for the $AUD as I've seen what that can adversely do to a stock's fortunes (QOR was a prime example).

@mikebrisy They spoke of the skew to H2 (historically H1 46% to H2 54%. The RSNA conference traditionally held in H1 is the primary contributor to this skew. Need to go back to the webinar, but I think that the commentary on the Employee Benefits Expenses was that would not recur in H2. If you consider these factors and then look to the timing of each of the Trinity Cohorts and the increase of new Revenue in H2Fy26 plus FY27, material impact to come.

Disconnect between what Sam said of AI in the context of threat and the news feeds sticking with the narrative of AI disruption. Audinate report on Monday and they took a pounding after the PME release. Is it unjustified FEAR winning the day ? Let’s see what is said on Monday and how the market reacts.

RobW

@RobW good point. The table I showed earlier indicates a clear 1.5% to 2% net margin uplift going from 1H to 2H, likely due to phasing of people costs as well as you say to RSNA (we see the same for $XRO with Xeroconn). But these patterns are understood by the market, so I was looking for something beyond known seasonality, which really should not drive SP swings because it is known.

I guess its clear that everything is getting painted with the same brush and at some point the over-reaction will drag any given stock potentially way below what the future justifies. I guess the challenge for stock pickers who decide to stay in the affected sectors, is to identify the right companies and the right timing. Unlike many or even most, I don't wait for the bottom to be in, because you often don't know until you are 20-30% out the other side. I just follow my process of sticking to highest conviction names, and using the meltdown to get into stocks that have been on my watchg list that I know well, but that I've not been able to justify buying on valuation ground. $PME being one.

Looking back over the last amost 10 years, my biggest returns have come when it felt most stomach-churning to buy, and when the prevailing narrative was woe woe woe. No idea if this will be the same, but at least I am used to the feeling of nausea and so am not reacting based on emotion.

Following excerpt is from: https://thebull.com.au/news/pro-medicus-shares-close-at-52-week-low-following-earnings/

Pro Medicus Shares Close At 52-Week Low Following Earnings

by The Bull Team Updated - 12 Feb 2026

Pro Medicus shares (ASX:PME) crashed to a 52-week low of A$129 today, falling 23.88% despite reporting record half-year earnings that exceeded expectations across most operational metrics. The dramatic selloff underscores the challenge of meeting lofty market expectations when trading at premium valuations.

The medical imaging software provider’s shares closed at A$129, marking a new 52-week low and wiping approximately A$2 billion from the company’s market capitalisation in a single session. Prior to the results announcement, Pro Medicus was trading at approximately 110 times forward price-to-earnings and around 77 times enterprise value to EBITDA, suggesting markets had already priced in years of flawless execution. The sharp decline indicates that even strong results failed to justify the premium valuation multiples that had been embedded in PME’s share price.

The Financials

For the six months ended 31 December 2025, Pro Medicus reported revenue of A$124.8 million, representing a 28.4% increase on the prior corresponding period. The company’s underlying earnings before interest and tax margin expanded to 73% from 72% a year earlier, demonstrating continued operational leverage as the business scales.

Underlying profit before tax climbed 29.7% to reach a record A$90.7 million, reflecting the high-margin nature of Pro Medicus’s cloud-based radiology information system. The company declared a fully franked interim dividend of 32 cents per share, consistent with its progressive dividend policy.

However, reported net profit after tax came in at A$171.2 million, up 230.9% on the previous year. This headline figure was significantly inflated by unrealised gains of approximately A$150 million from Pro Medicus’s A$10 million investment in 4DMedical Ltd, a separate ASX-listed medical technology company. While this investment gain enhanced the statutory bottom line, it represents a non-operational, mark-to-market adjustment rather than cash earnings from the core business.

Contract Wins and Cloud Migration

During the reporting period, Pro Medicus secured seven new contracts with a total contract value exceeding A$280 million. The standout deal was a A$170 million, 10-year agreement with University of Colorado Health, one of the largest contracts in the company’s history. This win reinforces Pro Medicus’s competitive position in the North American healthcare market, where it competes against established players with significantly larger sales forces and marketing budgets.

The company completed six key implementations during the half, all of which were cloud-based deployments. This transition to cloud architecture has become a defining characteristic of Pro Medicus’s growth strategy, offering customers faster deployment times, lower upfront capital expenditure, and greater scalability. The cloud model also benefits Pro Medicus by reducing implementation complexity and accelerating the path to recurring revenue recognition.

The contract pipeline remains robust, with Pro Medicus continuing to pursue opportunities across large integrated delivery networks and academic medical centres in North America and Europe. The company’s transaction-based pricing model, which charges based on the number of studies processed, aligns its revenue growth with customer usage patterns.

Valuation Reality Sets In

The market reaction appears driven by the recognition that Pro Medicus’s valuation had run ahead of even optimistic growth scenarios. At more than 100 times forward earnings, the shares had little room for error, requiring not just strong results but transformational surprises to justify further appreciation.

Analysts have noted the difficulty in forecasting the precise timing and phasing of revenue contributions from the substantial contract wins secured over the past 12 months. While the total contract value provides visibility into future revenue potential, the actual recognition depends on implementation schedules, customer go-live dates, and transaction volumes, all of which can vary significantly from initial estimates.

The presence of A$150 million in unrealised investment gains within the statutory profit figure may have also contributed to market scepticism. Sophisticated investors typically focus on underlying operational metrics rather than mark-to-market fluctuations in minority investment positions, particularly when those gains represent more than half of the reported profit.

The fundamental investment case for Pro Medicus remains centred on its ability to displace legacy radiology systems with superior technology that offers faster processing speeds, better user interfaces, and lower total cost of ownership. The company’s Visage platform has demonstrated particular strength in enterprise deployments, where its scalability and cloud-native architecture provide distinct advantages.

However, the valuation reset reflects a more cautious assessment of the pace at which this opportunity can be monetised. With the stock having delivered exceptional returns over the past five years (+185%, after allowing for the recent ~60% pullback from highs), markets appear to be demanding evidence that growth can be sustained at rates sufficient to grow into the premium valuation.

The sharp decline may present an entry opportunity for long-term investors who believe in the company’s technology leadership and market position, though the question of whether A$129 represents fair value depends heavily on assumptions about contract implementation timing, competitive dynamics, and the sustainability of EBIT margins as the business matures.

---ends ---

Source: https://thebull.com.au/news/pro-medicus-shares-close-at-52-week-low-following-earnings/

My Views here: https://strawman.com/forums/topic/12547#post-41728

Disc: Not held.

@mikebrisy

'Looking back over the last amost 10 years, my biggest returns have come when it felt most stomach-churning to buy, and when the prevailing narrative was woe woe woe. No idea if this will be the same, but at least I am used to the feeling of nausea and so am not reacting based on emotion'

I couldn't agree with this more. This type of volatility is sensational for stock pickers folks, embrace it and wait for your opportunity. This is continued validation that it is a risky game buying a story at significantly inflated multiples (which XRO, PME and the like). You are priced for perfection, but also sentiment. Either one can send the world crashing down. Conversely though, when this happens the opportunities are significant. It is clear I purchased Wisetech too early, but I am close to topping up at these levels. PME is also interesting to me. I would like to see them under 100 and I am happy to pass until that point.