The Pro Medicus Limited (ASX: PME) share price is down 1% to $27.09 today and down around 30% off recent highs as hot ASX software shares give back some ground.
For example the likes of WiseTech Global Ltd (ASX: WTC), Technology One Limited (ASX: TNE) and Altium Limited (ASX: ALU) have all fallen by double-digit percentages from recent 52-week highs.
Based on 104 million shares on issue Pro Medicus boasts a market value around $2.84 billion. This compares to a fiscal 2019 net profit of $19.1 million on revenue of $50.1 million. The profit and revenue were up 83% and 47% respectively on the prior year.
While the growth is impressive we can see that the company is trading on sky-high multiples of profit and revenue.
It's also trading on around 148x trailing earnings of 18.36 cents per share.
Another eye-catching part of the business are the superb profit margins that are a feature of capital light software operators with recurring revenues.
High profit margins also suggest a company has a strong competitive position or some sort of pricing power.
For example a software and hardware business like Apple Inc. boasts high margins as it never discounts products and charges high prices. That shows to us it's a quality business and investment. In other words due to the product quality, it's hard for competitors to shake its grip on its market.
Of course the risk to any business is increased competition eating away at profit margins particularly from discounters that may have improving products.
On that front news today about a huge deal for one of Pro Medicus's few rivals in the medical imaging space may give investors pause for thought.
According to Pulse IT Magazine rival medical imaging software provider Canon (ex Toshiba) has signed a $47.2 million "contract to roll out a new medical imaging system for WA Health, replacing the state's old Agfa radiology information (RIS) and picture archiving and communication (PACS) systems."
Pro Medicus primarily sells its software in US markets and the loss of one potentially competitive tender is no big deal, but suggests it has rising competition.
For full disclosure I am a former Pro Medicus shareholder but sold my entire holding between early August and early September primarily on valuation grounds. Generally, I remain positive on its outlook though.
