There is a paradox at the heart of Pro Medicus Ltd (ASX: PME) right now.
Pro Medicus shares are down approximately 50% from their all-time high of $336.
The reason most investors give for that decline is artificial intelligence: the fear that AI will commoditise radiology software and make Visage, Pro Medicus's core platform, obsolete.
However, this week, Pro Medicus signed a $28 million five-year contract renewal with Allegheny Health Network, an existing client, at higher fees than the prior contract.
Pro Medicus shares jumped 12% on the news. The contract renewal, at richer terms than before, is a rebuttal possible to the AI disruption narrative. If AI were genuinely threatening the Visage platform, clients would be hesitating.
Instead, they are recommitting at higher prices.
Image source: Getty Images
The AI disruption fear explained
The selloff in Pro Medicus shares began in earnest when the broader market started selling high-multiple software stocks on concerns that large language models and generative AI would displace enterprise software platforms.
The theory, applied to Pro Medicus, goes like this: if AI can interpret radiology images directly, perhaps hospitals will not need expensive dedicated radiology software like Visage at all.
This theory, based on the evidence, almost certainly wrong.
James Gerrish from Shaw and Partners addressed this directly, stating:
We think Pro Medicus is one of the few names where AI is more likely to enhance the moat than erode it. Rather than replacing Visage, AI can make the platform more valuable by improving radiology workflows, accelerating image analysis, supporting detection tools and automating parts of the reporting process.
Pro Medicus CEO Dr Sam Hupert has been even more direct.
He said:
Many have tried to replicate our tech stack over the last 17 years, but no one has succeeded, with or without AI.
Management has been actively embedding AI capabilities into Visage, including advanced breast cancer screening applications and its RadPath Hub. This tool integrates radiology and pathology data to support more sophisticated clinical decision-making.
This has made the product stronger, and clients are taking notice.
The numbers that matter
Ignore the share price noise and the underlying business continues to perform at an extraordinary level.
In the first half of FY2026, Pro Medicus delivered revenue growth of 28.4% to $124.8 million, with underlying profit before tax rising 29.7% to $90.7 million.
The company maintained an EBIT margin of 73%, one of the highest of any listed technology company in Australia.
Five-year contracted revenue now sits at approximately $1.1 billion, giving the business extraordinary earnings visibility.
Pro Medicus continues to maintain an exceptional customer retention record, while also winning major contracts against much larger competitors, a strong endorsement of the quality of its technology and the value it delivers to customers.
Yesterday's Allegheny Health Network renewal is the latest in a string of contract wins and renewals that include a $330 million ten-year contract with Trinity Health and a $37 million five-year renewal with Northwestern Medicine.
Every renewal at higher fees confirms the competitive moat is intact.
What brokers think about Pro Medicus shares
The broker community has stayed firmly behind Pro Medicus shares through the selloff.
Gerrish from Shaw and Partners told investors his team was buying Pro Medicus shares for their Active Growth Portfolio, naming it the most defensively positioned software business on the ASX.
Morgans maintains a buy rating on Pro Medicus shares, noting that the longer-term growth outlook has actually strengthened through the recent wave of significant contract wins.
Catapult Wealth has also named Pro Medicus as a buy, pointing to growing market share in the United States and strengthening pricing power as evidence the AI disruption narrative is overdone.
The valuation question
Pro Medicus shares are not cheap even after the significant decline.
The stock trades at a meaningful premium to the broader market on earnings-based measures, reflecting the extraordinary quality of the business.
For investors who require a margin of safety in traditional valuation terms, Pro Medicus may not be the right stock.
However, for investors who believe the quality of a competitive moat, the strength of recurring revenue, and the trajectory of earnings growth are the right frameworks for valuing a business, the current entry point looks more attractive than at any point since 2022.
Foolish takeaway
Pro Medicus shares fell on fears that AI would destroy the business.
Yesterday's contract renewal at higher fees than before is the clearest possible evidence those fears are wrong. AI is not the enemy of Pro Medicus. It may, in actual fact, be a friend.
According to Shaw and Partners, Morgans, and the company's own management, AI is making the Visage platform more valuable, not less.
For patient investors willing to hold through ongoing volatility, this could indeed prove to be a once-in-a-generation entry point into one of the finest software businesses on the ASX.
