The ASX is home to some great businesses, and long-term shareholders may have made good returns from those stocks. The highest-quality ASX shares have delivered massive returns and don't look as though they're going to stop any time soon.
When valuations go higher and higher, investors may be wondering if it's still worth buying them.
We all want to own quality companies, but it's understandable if there are questions about whether these high-flyers can still be attractive.
According to Google Finance, over the past 20 years, the share prices of Pro Medicus Limited (ASX: PME) and REA Group Ltd (ASX: REA) have both risen by more than 20,000%. Wow!
However, their prices may now seem frothy to some people, even when considering FY25's potential earnings growth. I'm going to explore whether they can still be good investments.
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High earnings multiples
Share market valuations are typically forward-looking, so the current share price is usually taking into account how the company's operations/earnings could grow in the next few years.
According to Commsec, in FY25, REA Group could generate $3.63 of earnings per share (EPS), which puts the REA share price at 61x FY25's estimated earnings.
Estimates on Commsec suggest that Pro Medicus could make $1.01 of EPS in FY25, which puts the company's forward valuation at 186x FY25's estimated earnings.
On face value, I'd call the REA price-earnings (P/E) ratio high, while the Pro Medicus valuation appears extraordinarily high.
High-quality
What could justify such a high price for these companies?
I'd say it's because these companies have proven themselves to be the best at what they do, and they're generating increasingly strong profits.
REA Group is the owner of Australia's leading property portal, realestate.com.au. Many property sellers feel obligated to put their property in front of as many eyes as possible. Having more potential buyers can attract the most sellers to the website. It's a positive cycle that keeps REA Group in the number one position. Property is seen as a very important asset in Australia, so this ASX share has put itself in a great position to capitalise over the long term.
Pro Medicus provides cloud-based software called Visage, which is used for various purposes by the radiology sector. It also helps healthcare professionals be more efficient. It's proving incredibly popular; it has won a number of large, long-term contracts with healthcare organisations in the US and Europe. The latest win was an eight-year contract renewal with a minimum value of A$98 million with Mercy Health in the US, which is a longer contract at an increased price than the last contract.
REA Group and Pro Medicus are financially benefiting from their leading services. In their FY24 results, Pro Medicus reported revenue growth of 29.3% and net profit growth of 36.5%, while REA Group revealed revenue increased 23% and net profit increased 24%.
Long-term growth
Winners usually keep winning over the long term. When it comes to 'winning', I'm talking about their operations and profit growth – the share price growth can take care of itself if the building blocks are there.
REA Group has a compelling future, in my mind, and that's why I decided to invest after the Rightmove-related sell-off. It has since rebounded after no deal could be agreed.
I'm not sure what the pace of future advertising price increases will be in Australia, but the company is delivering rapid growth in India, which is a huge opportunity with its digitalisation tailwind and population of well over 1 billion. The ASX share's REA India revenue grew by 31% to $103 million. In ten years, I think REA Group will be much more profitable.
Pro Medicus has an exceptional future. Its revenue is growing, its operating profit (EBIT) margin keeps climbing well above 60%, its renewed contracts are at a higher price, the business is utilising AI, its balance sheet is debt-free, and the regular dividend growth is impressive.
