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Buy, Sell, or Hold: Nuance Communications

When considering any stock for your portfolio, don't be swayed by just the positives. Examine its pros and cons and decide whether its possible upsides outweigh its risks. Let's take a look at Nuance Communications (Nasdaq: NUAN  ) today and see why you might want to buy, sell, or hold it.

The company specializes in voice-recognition technology and has gained about 14% over the past year. In the past decade, its shares have grown at an annual average of about 13%.

Why might you buy Nuance? Its business is rather promising: A not-so-far-fetched vision of the future is one in which we operate a lot of devices by speech, rather than by pushing buttons. It's already happening with smartphones -- think Siri, for example.

The company's financial statements offer more reasons to smile. Five-year average annual revenue growth rate: 22%. Total debt-to-equity ratio: 0.5.

The most compelling reason to buy for many investors is Nuance's relationship with Apple (Nasdaq: AAPL  ) . Nuance's products support voice-recognition programs like Siri. Investors were a bit disappointed that she didn't appear in the latest iPad, but she may well turn up in future models, as well as other devices. Apple is not Nuance's only customer, either. It also serves Research In Motion (Nasdaq: RIMM  ) and Nokia (NYSE: NOK  ) .

Also promising is the fact that the company is expanding in new directions. For example, it is developing business applications in the medical arena, which can help doctors dictate notes, among other things. This can help boost Nuance's top line, of course -- and it can also enhance the bottom line. The company's health-care division recently sported the highest operating margins.

Nuance is busy making acquisitions, too, such as Transcend Services (Nasdaq: TRCR  ) , a transcription and editing company that will fit into its medical initiatives. Late last year it was announced that Nuance was buying its chief rival, Vlingo, which certainly bodes well for it competitively.

While Nuance's financial statements present some strong numbers, they also offer some less-than-ideal ones. For starters, the company has been operating in the red for quite a while. It has finally posted net gains for 2011 and this year so far. Gross margin has generally been falling over the past decade, though net margin has gradually been rising.

Volatility is another reason to steer clear, if you're faint-hearted. The stock took a 13% hit recently, for example, when the company reported disappointing earnings. But that was largely due to delayed revenue, which is generally not a catastrophe. For most investors, volatility shouldn't be feared. It's a natural part of the stock market, and if you're planning to hold on to a stock for many years, it shouldn't matter too much whether it moves in a straight or jagged line.

Finally, there's competition. There are companies out there with far deeper pockets than Nuance that might want to try to eat its lunch., for example, recently bought speech-recognition company Yap.

Given the reasons to buy or sell Nuance Communications, it's not unreasonable to decide to just hold off. You might wait for it to post more quarters in the black. You might wait for its technology to appear in even more devices, such as iPads. You might wait for fatter profit margins.

The verdict
Nuance Communications has a lot to recommend it, but I think I'll hold off on it, at least for now. After all, there are plenty of compelling stocks out there. Investing in it now doesn't seem crazy, though. If you're intrigued, dig a little deeper into it.

Nuance is becoming firmly embedded in mobile devices, and mobile technology appears to be driving a lucrative trillion-dollar revolution. Many companies will cash in on it, but one in particular has excellent prospects. Check out this free report to learn about a company powering the revolution from the inside.

Longtime Fool contributor Selena Maranjian, whom you can follow on Twitter here, holds owns shares of Apple and, but she holds no other position in any company mentioned. Click here to see her holdings and a short bio. The Motley Fool owns shares of The Fool owns shares of Apple. Motley Fool newsletter services have recommended buying shares of Nuance Communications, Nokia, Apple, and Motley Fool newsletter services have recommended creating a bull call spread position in Apple. The Motley Fool has a disclosure policy.

We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

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  • Report this Comment On April 29, 2012, at 11:31 AM, tokelau wrote:

    Off topic: 'the Motley Fool owns shares of Amazon' and 'The Fool owns shares of Apple', say what??? Are these 2 different entities?

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