This morning, radiology software provider Pro Medicus (ASX: PME) reported its results for H1 FY 2026. Revenue was $124.8 million, up 28.4%, while underlying profit after tax (excluding fair value movement of financial assets) was up 29.7% to $90.7 million. In response, the Pro Medicus share price fell about 24% to $129 per share.
Statutory profit was $243.3 million, but this number includes an uncrystallised gain on Pro Medicus’ investment into 4D Medical (ASX: 4DX), and it is very likely that at least some of that gain will reverse in future periods. If we applied a 30% tax rate to the $90.7m underlying figure, we’d have a hypothetical underlying net profit after tax of about $63.5 million.
While that is a good result on an absolute level, you can see from the chart below that the half on half growth was lower than it has been since the first half of FY 2024. Therefore you could definitely characterise the H1 FY 2026 results as showing slowing profit growth, albeit only after a very strong couple of years.
The main reason for the slower half-on-half growth was that revenue growth from the all important USA business moderated, down to about 8%. This is the lowest rate of half-on-half revenue growth since the initial impact of covid lockdowns on scan volumes, back in 2020.
Profit before tax margins were roughly what you’d expect, between 72% and 73% based on underlying profit before tax. We can expect a slightly higher margin in the second half when the company does not face the burden of the RSNA conference costs.
Free cashflow, calculated by subtracting capitalised development costs, capital expenditure lease liabilities from operating cashflow, came in just above $60m for the half which shows strong conversion from underlying profit after tax to free cash flow. The balance sheet remains rock solid with cash, term deposits and debt instruments worth over $220m. On top of that, the company has its investments in 4D Medical and Elucid. While those are not liquid assets – and I doubt that the 4D Medical (ASX: 4DX) investment will do well from here, in the near term, given its strong run – they are still worth something.
However for the sake of simplicity, I’d ignore the value of those investments, which are best thought of as strategic rather than financial investments. The benefit of these investments should manifest through increasing the number of diagnostic products that Visage can offer to its users, and in turn, by increasing revenue growth.
Does AI Threaten The Pro Medicus Business Model?
On the conference call, the vast majority of the questions were to do with artificial intelligence, either probing Pro Medicus’ own artificial intelligence capabilities, or exploring how AI technology might hurt the Pro Medicus business model.
Since Pro Medicus charges money based on the volume of radiology images examined on the platform, as long as radiologists are using Visage to deploy the artificial intelligence assistance, then volumes will continue to grow, in accordance with the long term trend. However, if for some reason, artificial intelligence were, for example, used to determine which scans should even be examined by a radiologists, then that would reduce volume.
Hypothetically, you could imagine a scenario where, in order to deal with the deluge of work, a hospital might insert artificial intelligence at the stage prior to a radiologist. Then if the artificial intelligence could rule out a certain diagnosis, then a radiologist might never even view the study in Visage.
However, at present, that threat seems a very long way off, because the social and legal settings are not yet in place to take that sort of risk for patients. What would happen if the artificial intelligence gave a scan the all clear, no radiologist ever looked at it; and then it turned out that the artificial intelligence was wrong? It just doesn’t seem wise, given the potential legal ramifications.
But as soon as you include the radiologist in the loop, then that is where the Visage competitive advantages kick in. Because Visage is above all else designed for radiologists, and its supremacy as a radiology platform arises from the fact that it makes radiologists more efficient.
The sources of efficiency are the sources of competitive advantage. For example, files load faster with Visage than with competing platforms. That allows radiologists to be more efficient and, since the availability of radiologists is a major bottleneck in radiology, and radiologists are so expensive, Visage allows its clients to provide a better service, faster, and also saves money by allowing radiologists to look at radiology studies much faster.
On top of that, if you are, in fact, a genius researcher who has managed to create an artificial intelligence tool that can diagnose tumors, or fractures, or bloodclots, then the fastest and easiest way for you to recoup your investment would be to partner with Visage to make your product immediately available to all the best radiologists in the world. In exchange, Visage would clip the ticket on the cost of using that algorithm. Ideally, the insurer pays, and everybody wins.
Pro Medicus CEO Dr Sam Hupert went to some effort to address the impact of artificial intelligence on the business, given that clearly it this zeitgeist change has burst the valuation bubble previously benefitting the stock. Among other things, he said:
“I thought this was an interesting quote from the ABC just from last week. But it basically says software is a sinkhole, AI may revolutionize the way we work and could very well lay waste to business empires that themselves only recently overthrew the old world order. And there’s been a lot of headlines similar to this. Our view is that we think this is a gross generalization and overstatement of AI capability.”
That also is my view. However, the important thing to note as investors is that this “software is a sinkhole” narrative undermines the “software is eating the world” narrative, and that means that even if artificial intelligence technology were to advantage Pro Medicus over its competitors, the market may never ever become so optimistic about the company as it previously was.
That may simply be because previously there was a great deal of optimism about all software companies, and Pro Medicus was considered one of the best. And now, Pro Medicus may still maintain a higher P/E ratio than most software companies, but because the P/E ratios of these similar but inferior companies are lower, so too will the P/E ratio of Pro Medicus, remain lower.
Therefore even if the impact of AI on earnings is positive, the short and medium term impact on the share price of Pro Medicus is quite possibly going to be negative, regardless of what me, you or Dr Hupert thinks!
Are Pro Medicus (ASX: PME) Shares a Buy?
To be conservative, I’d assume an underlying hypothetical net profit after tax of about $140m in FY 2026. This implies a second half that is only marginally stronger than the first, and I think that because of the timing of implementations, in fact we will see strong profit growth next half. However, we could also see a negative impact from a stronger Australian dollar and it is better to be conservative anyway.
At the current share price of $119.50 Pro Medicus has a market capitalisation of about $12.5 billion. That implies a (conservative) FY 2026 price to earnings ratio of about 90x.
A simple thought experiment explains why I think that Pro Medicus shares are now likely to produce positive returns for buyers.
Assumption one: in about a decade, Pro Medicus grows more in line with demand for radiology, once it exhausts market share gains.
Assumption two: Pro Medicus can easily double its market share over the next five years, with further increases after that, albeit slower.
Assumption three: as it scales profit margins will remain steady or increase.
If we agree with these assumptions then at a minimum Pro Medicus will double its profit in the next five years. If the share price remains the same, then it would trade on 45x earnings, having just doubled its profits in five years, with more growth to come.
If we then assume it grows its profits by 60% in the subsequent five years, it would be on a P/E ratio of around 28, with a very reasonable expectation of continued steady and long-term profit growth beyond that.
Now the simple truth is I don’t think there is any way that the stock would trade at a P/E of 28 if the events described above came to pass. And, based on the fundamental performance of the business, I think the assumptions above will prove conservative.
Of course, it would be possible for the stock to trade at 30 to 40 times earnings in ten years, and that might mean that while the returns were positive, they might not beat the market.
In the short term, given that there is a huge amount of pessimism about software stocks, I think that it is quite likely that the stock will trade lower. For these sociological reasons, I would only buy a very small holding of Pro Medicus shares, right now, if I didn’t own any already.
Because I already do own Pro Medicus shares, and I was prioritising writing this article, I have not bought any myself at these prices. And for me to buy more shares, I would need the price to be even more compelling, given I already have exposure to the stock. On top of that, I think that the stock price will basically bottom around the time that fears that AI will destroy software companies peak. Therefore, observing the sociological phenomena might be a decent guide as to when to buy shares.
To me, Pro Medicus shares are already in the buy zone, albeit only just, and only for someone who has no exposure already. That’s because I think that there will probably be plenty of opportunity to buy shares at current or cheaper multiples. I wouldn’t rush and I’m certainly not calling a bottom.
However, I do think that the current panic around the impact of artificial intelligence on software company profits is overdone, and I think that Pro Medicus is probably just as likely to benefit from AI tech advances than suffer from them. Therefore, I do consider Pro Medicus a buy at current prices, with the caveat that if I were to accumulate, I would do so slowly, not suddenly, given the clear propensity for the shares to fall further as a result of analysts and investors moderating their future expectations of the stock down from previously very optimistic levels.
Disclosure: The author of this article owns shares PME and will not trade PME shares for at least 2 days following the publication of this article. This article is not intended to form the basis of an investment decision and is not a recommendation. Any statements that are advice under the law are general advice only. The author has not considered your investment objectives or personal situation. Any advice is authorised by Claude Walker (AR 1297632), Authorised Representative of Ethical Investment Advisers Pty Ltd (ABN 26108175819) (AFSL 276544).
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