The Pro Medicus Ltd (ASX: PME) share price has been one of the worst performers of the S&P/ASX 200 Index (ASX: XJO) within the last year. Massive underperformance could lead to an impressive recovery if one of two things happens.
As the above chart shows, it's down around 50% in the last 12 months and it has fallen 60% from mid-July 2025, at the time of writing.
I think the company is still one of Australia's highest-quality businesses. But, it hasn't been treated as such, seemingly due to worries about what impact AI may have on the software industry in the coming years.
Pro Medicus is now a lot cheaper on a price/earnings (P/E) ratio basis. I think the Pro Medicus share price could rise significantly if either: the market becomes less worried about AI or the company's improving financials can excite the market – its P/E ratio doesn't need to rise for it to deliver good returns over the next few years.
We can't know how the market will treat software businesses in the future, but profit growth looks very promising for the business.
Image source: Getty Images
Continues to win contracts
Last year, the company commanded a high valuation (and share price), partly due to market expectations that the business would continue winning significant contracts from important customers.
I don't have a crystal ball to know how future potential contracts will go. However, the future still looks very bright, in my opinion, with the company announcing two contracts since the start of April 2026.
One was a new 5-year, A$23 million contract with the University of Maryland Medical System.
The other was a A$37 million contract renewal with Northwestern Medicine. This was negotiated with increased minimums and an increased fee per transaction – those are great positives because they suggest future organic revenue growth from its existing client base.
Pro Medicus is now being priced for significantly less success. But, its software is still just as excellent as it was before, so if it continues to win new contracts then it will drive earnings higher.
Finally, I'll also note that I like the move to expand into cardiology because it gives the company another growth avenue for the long-term, though I'm not expecting a lot from that endeavour at this stage.
Incredible profit margins
I expect the company's revenue to continue growing for the foreseeable future. It has an incredibly high operating profit margin, which I believe will translate into the bottom line continuing its excellent progress, justifying a higher Pro Medicus share price.
In the FY26 half-year result, Pro Medicus reported an underlying operating profit (EBIT) margin of 72.6%, which is one of the highest on the ASX. That implies more than 70% of new revenue is turning into usable operating profit.
Therefore, I think it's very likely that the business can continue delivering earnings growth, making the current valuation seem reasonable.
Better Pro Medicus share price valuation
According to the projections on Commsec, at the time of writing, the Pro Medicus share price is valued at 91x FY26's estimated earnings, 71x FY27's estimated earnings and 60x FY28's estimated earnings. Its net profit is forecast to rise by 50% between FY26 and FY28.
It's still not traditionally 'cheap', but I think its incredible financial power may now be underestimated by the market and this could be a compelling opportunity to buy and hold for the long-term.
