Strength To ‘AI’ Strength For Pro Medicus

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Pro Medicus shares surge on major contract wins and growing AI momentum, reinforcing its position as a high-margin healthcare tech leader against a background of eternal valuation debate.

-April’s stock dip reversed with major contract wins -Cardiology expansion signals strategic depth -Earnings accretion a longer term story -Valuing Pro Medicus remains a challenge -AI Momentum Adds Future Tailwinds

By Danielle Ecuyer

April’s sell-down has faded to gray

The April Liberation Day inspired sell-off in the Pro Medicus ((PME)) share price might seem like an eternity ago, as the company’s latest two contract announcements have further ignited buying interest and broker upgrades for the stock.

Having declined to a low of $160 in early April, as general risk-off sentiment and uncertainty instilled a ‘sell-everything’ stance, the shares are now trading over $310, which equates to a FY26 forecast earnings (using FNArena consensus EPS data) of just over 200 times.

While some analysts are drawing a line in the sand over valuation notably Morgans who states “The math ain’t mathing”, other analysts have upgraded earnings and price targets by one extra notch (or more).

The conundrum over valuation is not a recent issue, as highlighted by FNArena’s recent updates, but more on that vexing topic later.

https://fnarena.com/index.php/2024/12/19/pro-medicus-a-global-software-super-star/ https://fnarena.com/index.php/2025/02/19/pro-medicus-valuation-predicament/

Flexing the Pro Medicus muscle

On July 3, Pro Medicus announced two contract updates: a renewal for $20m over five years at $4m per annum with Franciscan Missionaries of Our Lady Health System (FMOLHS), based in Louisiana. The original contract from 2016 was $7m over seven years.

The second contract for UCHealth, for $170m over ten years or $17m per annum, is notable for several reasons, including being the second-largest contract win for the company post-November 2024’s Trinity deal for $330m over ten years, and exceeding the September 2023 contract for Baylor Scott & White for $140m over 10 years.

The UCHealth contract brought forth a 14-hospital network, which will go live next calendar year in 2Q 2026. Wilsons stresses UCHealth signifies the type of contract it envisages for Pro Medicus: a large, not-for-profit network where the complex nature and scope involve sizeable investment in IT infrastructure.

As highlighted by Bell Potter, this contract includes PLUS Visage 7 Cardiology (ultrasound images) and the Visage 7 cloud platform, including the full stack: Viewer, Workflow and Archive, and is the second deployment of cardiology into a contract.

Moelis explains this is substantial as a reference for Pro Medicus’ cardiology product suite and validates management’s strategic direction in expanding into cardiology imaging.

Cardiovascular disease is an important area of medicine in hospitals; thereby extending Visage’s strategic reach into cardiology enhances the depth of the service offering as well as the potential scale of the addressable market.

Ord Minnett estimates cardiology represents around 10%-15% of the UCHealth contract, which may extend beyond ultrasound to MRI and PET scans, which would boost cardiology to 15%-20% of the contract. This analyst stresses the tender process for this contract was very competitive and emphasises the “strength” of the Visage 7 products, as it is notably more expensive than competing systems.

Wilsons believes the UCHealth contract reinforces the ability of Pro Medicus to disrupt legacy PACS (Picture Archiving and Communication Systems) on longer-term contracts for large customers. The contract length of ten years compares to the previous rate of five to seven years.

This broker details how UCHealth has been in an expansionary/acquisitive phase, with Visage 7 being applied to its Colorado, Wyoming and Nebraska sites. The not-for-profit is planning a doubling of capacity at Colorado Springs across its Loveland, Longmont facility, and the group’s flagship University Colorado Hospital at a combined investment of US$702m.

Pro Medicus’ deal with UCHealth is structured on projected imaging usage, but if UCHealth ends up doing more scans than estimated, which often happens, Pro Medicus stands to earn more than the contract headline suggests, which could achieve significant coverage upside.

This is a core feature of Pro Medicus’ scalable, high-margin SaaS business model, where growth in imaging volumes directly drives additional revenue beyond the initial contract size.

Impact on earnings and pondering the stock’s valuation

Since 1H25 results, Pro Medicus has announced these two contracts plus the contract renewal of University of Iowa at $20m for five years, making the UCHealth contract accretive to revenue forecasts from analysts.

The renewal of FMOLHS included higher pricing on Visage than the original contract and conversion to the cloud offering including new services. Moelis expects multiple contract maturities and renewal opportunities over 2026, with activity expected to pick up in 2028.

Bell Potter expects the exam revenue impacts to emerge in FY27, which includes a forecast rise in FY26 exam revenue to around $299m from $230m currently. With scope for 10% organic growth, the FY27 exam revenue forecast is already seemingly within reach.

This analyst suggests the company’s earnings transparency and growth will underpin ongoing momentum.

Morgan Stanley has turned to Lifetime Value (LTV) to assess the valuation of Pro Medicus, which is a measure of the total gross profit a business is expected to earn from a customer over the life of the relationship.

The lifetime value for a Pro Medicus customer is calculated by multiplying the annual recurring revenue by the gross margin, divided by the churn rate.

Software companies like WiseTech Global ((WTC)) and Xero ((XRO)) have shown a strong correlation between this valuation and the market capitalisation over time.

In the case of the recent ten-year contracts with Trinity and UCHealth, Morgan Stanley estimates when the contracts are grossed up for 100% of volumes they represent around $60m in annual revenues.

What is more significant to the value of Pro Medicus shares is its near-zero churn rate alongside gross margins of 99%.

The analyst calculates the combined value of the two contracts could be above $5bn if a 1% churn rate is applied to the valuation formula. This is circa 20% of the current market capitalisation of nearly $25bn.

Before one becomes too carried away, the valuation estimate can easily decline if, for example, a new competitor takes market share away from Pro Medicus and/or the churn rate rises.

At current prices, Pro Medicus shares are trading at 130 times FY26 earnings (EBITDA), with around an 8%-9% market share in the US, which infers the market is pricing in a 25%-30% market share by FY32. Morgan Stanley believes this range of share is achievable and ignores any possible uplift from cardiology or AI.

An additional earnings boost comes from increases in the price per scan, which seems likely as at current levels of $3-$4/scan as a percentage of CT or MRI billable cost, that price remains very low.

Ord Minnett errs on the conservative side for EPS forecasts, leaving FY25 unchanged and raising FY26 and FY27 estimates by 0.8% for both years, noting additional contract wins can underwrite a lift in forecasts.

Wilsons points to a rise in FY27 revenue forecast by 5% for the UCHealth contract, and alongside Trinity, margin expansion is flagged to lift by around 200bps to 55% for forecast net profit after tax in FY27. Overall, the updates result in the analyst increasing net profit after tax forecast by 8% for FY26 and 9% for FY27.

The conservative Morgans analyst estimates the UCHealth contract sits just under the top 40 hospital systems in the US, but is larger than the Baylor Scott & White Health contract, with only 30% of the number of hospitals in its network.

While acknowledging there are some potential large hospital contracts as part of the total addressable market, which Morgans refers to as “monsters”, this analyst is quick to caveat the $3bn rise in the stock’s market capitalisation on the day of the announcement for an additional $17m in annual recurring revenue does not “compute”.

Moelis believes these contracts and higher value renewals are indicative of Pro Medicus’ growth strategy, and the analyst stresses the market is valuing upward earnings revisions whereas few companies can deliver that.

Using FNArena data as supplied by FactSet, Pro Medicus’ compound EPS growth rate from FY19 to FY24 has been 33.79%. Applying FNArena daily monitored brokers’ forecast EPS consensus data, the compound rate rises to 35.29% from FY19 to FY26.

Turning to the brokers’ ratings, the elevated valuation dissuades analysts from ascribing Buy-equivalent ratings. Morgan Stanley is the only daily monitored broker with an Overweight rating and a $320 target price. Bell Potter downgraded the stock to Hold from Buy with also a $320 target price.

Morgans, which doesn’t believe the math adds up in terms of valuation, has a Sell-equivalent rating and a $280 target price.

Research house Morningstar has raised its fair value for what the analyst states is a “narrow-moat” Pro Medicus by 5% to $50 and –surprise, surprise– sees the shares as “materially” overvalued.

Non-daily monitored brokers Wilsons and Moelis have respective target prices of $325 (up from $297) and $323.69, with ratings of Hold or equivalent.

The benefits of AI integration are yet to be seen

As the AI narrative and investment spend from hyperscalers shows no signs of ebbing, if anything, the competition for AI-related engineers and capex on data centres in the US continues to accelerate.

The trickle-down impacts of companies applying AI to their workloads is still at an embryonic stage. Second-order impacts, terms applied to the application of AI tools to improve products and service offerings, are on the rise.

Goldman Sachs highlighted in June last year Pro Medicus was one of a few companies that “has the potential to benefit from AI monetisation” with its technology well-suited to integrating AI tools in medical imaging.

Dr. Sam Hupert, CEO of Pro Medicus, stated:

“Radiologists have told us they don’t want separate systems when it comes to AI, so we developed an open API that allows our customers to choose the algorithms that best suit their needs, all fully integrated into the Visage 7 Enterprise Imaging Platform.”

Malte Westerhoff, Global CTO of Visage Imaging, highlighted:

“Our AI Accelerator program was designed to closely align Visage’s engineering and product development capability with clinical research partners such as UCSF (University of California, San Francisco), who have a depth of clinical knowledge and extensive research expertise.”

It is readily acknowledged service companies, including those in financial and healthcare sectors, are among prime AI beneficiaries. Pro Medicus is actively seeking out AI-driven solutions to support its cloud-native IT infrastructure in digital diagnostics and imaging.

While skeptics would say evidence of productivity improvements and margin expansion in terms of second-order effects remains limited to date, AI certainly has the scope for considerable earnings accretion for those companies successfully employing and embedding it.

For more in-depth details on past, present and future (also supported by FactSet data), see FNArena’s Stock Analysis: https://fnarena.com/index.php/analysis-data/consensus-forecasts/stock-analysis/?code=PME

FNArena’s dedicated section to GenAI might be worth visiting too: https://fnarena.com/index.php/tag/gen-ai/

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