Why the Pro Medicus share price is going gangbusters again

About Latest Posts Tom RichardsonTom is a holder of the CFA Society of the UK administered Investment Management Certificate (IMC) …

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The Pro Medicus (ASX: PME) share price climbed 5% to hit a record high of $14.94 in trade today despite the software-as-service medical imaging business releasing no specific news to the market.

In total the PME share price is now up 58% over just the last six months and an incredible 18x from 80 cents to $14.50 over just the past 5 years.

When a company posts these kind of eye-watering gains investors would be foolish to ignore it.

Over the last 6 months Pro Medicus has announced a couple of important new contracts in the US and Germany, but it seems increased analyst, sell side broker, and media attention are all helping to drive the share price higher.

After all, in FY 2018 it posted a net profit of $12.7 million on revenue of $35.9 million, yet today has a market value close to $1.5 billion.

Of course share prices are forward looking and it seems investors are counting on Pro Medicus delivering strong profit growth long into the future.

The valuation is also likely high as a lot of its revenues are recurring and contracted to give analysts using discounted cash flow valuation models greater certainty over 5-year revenue and profit streams at least. This can produce a lower discount rate for the risk that these cash flows don't appear and therefore a higher valuation.

Pro Medicus is not the only software-as-a-service recurring revenue business model stock on the ASX rocketing, with the likes of Xero Limited (ASX: XRO) and WiseTech Global Ltd (ASX: WTC) also impressing.

Tom Richardson owns shares of Pro Medicus Ltd. and Xero. The Motley Fool Australia's parent company Motley Fool Holdings Inc. recommends Pro Medicus Ltd. The Motley Fool Australia owns shares of and has recommended Pro Medicus Ltd. The Motley Fool Australia owns shares of WiseTech Global and Xero. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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