A lot of retail, SMSF, or 'mum and dad' style investors like to follow the sell side research of powerful investment banks or stock brokers to guide their investment decisions. And they don't come anymore powerful than Goldman Sachs, which just released a research note on one fast rising soon-t0-be S&P/ ASX200 (ASX: XJO) member Pro Medicus Ltd (ASX: PME).
The analysts like the business, but its vertiginous share price means it's now actually moved ahead of the $24 12-month share price target Goldman's slapped on the shares on June 10.
Yesterday, I also went over a few reasons I've been banking on Pro Medicus shares, which include, inter alia, its founder led nature, profitability, attractive SaaS economics and business model, alongside a track record of execution that suggest it could keep winning.
Goldies also outlines some of its own reasons why its positive on the medical imaging business.
Let's take a look at three of them below.
1) According to Goldmans, Pro Medicus currently still only has a 1%-2% market share of its addressable market. Moreover, "PME has secured long-term contracts with 5 of the Top 20 hospitals in the US, including the prestigious Mayo Clinic and Partners' Healthcare network, which we view as a strong vindication of this technology. We see clear scope for deeper penetration of this group and, as the track record grows, we expect slow but steady penetration of the mass-market channel."
I've got to say this is bullish talk and partly explains why the stock at $24.40 trades on around 50x annualised revenues or 139x annualised net profit. Today it's up another 3.5% to $26.20.
2) Nothing gets share market investors' pulses racing like 'Artificial Intelligence" and Goldmans reckons Pro Medicus might have an opportunity here. "We view diagnostic imaging as an area where Artificial Intelligence (AI) can have a meaningful impact, and we believe PME's existing AI module will be of growing interest."
This makes sense as AI for example could assist faster diagnostic interpretation for medical professionals. It could also play a separate in improving research studies by shifting and organising the vast data sets its imaging tools generate.
3) Pro Medicus has previously flagged that it wants its software to eventually move beyond radiology services. In other words it could offer cardiology and oncology one day. Goldmans noting, "PME intends to move beyond radiology into other 'ologies', a longer-term driver in our opinion."
Outlook
As we can see Pro Medicus has a lot of things going for it including wild investor enthusiasm for enterprise-facing SaaS businesses at the moment.
However, again I'd caution it does trade on an exceptionally high valuation and some of the buying may be in anticipation of its inclusion in the ASX 200 that means index-tracking funds will need to own a slice of a company with a small free float.
As such I'm not a buyer of Pro Medicus shares today as I'd rather focus on similar businesses, but on better valuations.
