The Pro Medicus Limited (ASX: PME) share price is putting on a rare display today.
Shares in the medical imaging software company have fallen on only four days over the past month. Barring an enormous afternoon rally, it appears we're on track for the fifth burgundy-tinged session for Pro Medicus shareholders.
As I write this article, shares are "rolling in the dee-ee-eep" (as Adele would say), down 8.5% to $245.66. Initially, that might sound rather devastating, but context is important. Even with today's blood-stricken performance, the Pro Medicus share price is still 154% better off than where it was situated at the end of 2023.
Why the fall?
Usually, an ASX announcement is the source of such a dramatic daily move. However, if we look at Pro Medicus' releases, we see a lot of nothing since Wednesday last week. Investors must be reacting to something other than news, then.
Without anything concrete to point to, we can only resort to presumptions. My best guess is that some people are choosing to crystallise part of their lucrative positions following a long stretch of exuberance surrounding Pro Medicus.
For example, if you'd invested $5,000 only two years ago into Pro Medicus, that amount would have been worth around $22,800 before today's opening bell. Pair this with an earnings multiple that looks lofty — at a price-to-earnings (P/E) ratio of 310 times — and it's not hard to see why there might be an appetite for profit-taking.
After all, co-founders Sam Hupert and Anthony Hall themselves cashed in about $256.7 million worth of shares last week.
Is the Pro Medicus share price tempting?
Fundamentally, Pro Medicus' valuation looks rich.
If we run some quick numbers, the company's free cash flow yield is around 0.3%. Think of the free cash flow yield as the cash the business pays you for your invested capital — sort of like the interest rate on a savings account.
Now, 0.3% isn't all that appealing compared to the 5% I could probably get on cash right now. Actually, it looks downright unsatisfactory. But that doesn't give us the whole picture. Future earnings ought to be considered, too.
That's where the water begins to get muddy, making it difficult to tell whether Pro Medicus is a good buy.
The company probably needs another decade of tremendous growth to justify its current valuation. Fortunately, the market opportunity for its picture archiving and communication system solutions in the United States might make that possible.
At the recent annual general meeting, Hupert stated:
We think about 85% [of the market] is addressable, including from both a product and commercial point of view. We now have about 7% of the market, a touch more. Doesn't sound like much, but America is a huge market, and no one has gone from 0% or standing start to 7% as quickly as we have.
Let's do some crude estimates based on the above… the last 12 months resulted in $161.5 million of revenue. It's not accurate, but let's just say this represents the 7% current market share. At 85%, it might suggest a 12-fold increase in revenue (85% divided by 7%) — equating to $1,961 million in annual revenue.
If I then assumed a 60% net margin, we'd probably be talking about $1,177 million in net profit. At a 25-times earning multiple, we'd arrive at a market capitalisation of $29.4 billion — approximately 15% higher than it is today.
Based on my rough napkin maths, I'd rather just hold onto my shares for now. However, if the Pro Medicus share price continues to fall, it might start to look interesting for adding to my position again.
