What to Expect From Nuance Communications for the Rest of 2012

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Tracking where a company has been is a good guide for the future. With September in full swing, now is a favorable time to revisit some of our top stock picks from earlier in the year. At the start of 2012, I gave Nuance Communications (Nasdaq: NUAN  ) an outperform rating on my profile in Motley Fool CAPS. Today, I'll take a closer look at Nuance, and how the remainder of the year should shake out for the voice-technology leader. But first, here's a bit of history on the topic.

Dreams do come true
Nuance Communications kicked off 2012 in true game-changer style, with Apple (Nasdaq: AAPL  ) making the speech-recognition group a household name. Nuance is the brains behind Apple's popular Siri personal assistant, but that's not all. It was one of the Mac maker's proudest moments when it unveiled the iPhone 4S fully equipped with the voice-activated interface, known as Siri. And for good reason.

Siri helped Apple achieve record smartphone sales. In fact, at the launch last year Apple sold more than 4 million iPhone 4S devices in the first three days -- marking "the most ever for a phone and more than double the iPhone 4 launch" during its first weekend, according to Apple. This is a trend that I suspect will continue, even as Samsung has taken the lead this year as the world's largest seller of smartphones.

Apple aside, Nuance has more than a few things going for it.

If you ask Fool analyst John Reeves, he'll plead the case for Nuance as a winning way for investors to ride the smartphone wave without coughing up $670 for a single share of Apple stock, while Nuance Communications' stock currently sells for about $23 a pop. That may seem affordable until you consider that the shares trade at more than 91 times earnings.

But before we jump to conclusions, let's see how Nuance measures up to similar stocks in the tech and telecom industries.

Increased competition
Some big names are getting into the speech-solutions game, including AT&T (NYSE: T  ) . In fact, the mobile carrier stands as a credible threat to Nuance's lead in the speech-technology space. For one thing, AT&T recently made its voice platform, Watson, available to developers. That's important, because it unlocks competition in the space by lowering the barrier to entry. Better still, AT&T is offering developers unlimited access to the Watson application programming interface for as little as $99 until the end of the year.

Meanwhile, Microsoft (Nasdaq: MSFT  ) is attempting to challenge Apple's Siri service with updated voice-activated features available on its Windows 8 Phone. The software giant partnered with Audible earlier this year in an effort to enhance speech controls that were previously available on its Windows 7 platform.

Both Microsoft and AT&T have deep pockets and the necessary resources to develop worthwhile voice-recognition software. However, it won't happen overnight, and for the time being, Nuance maintains the lead.  

Be it advanced voice technology or disruptive customer-service apps, Nuance is headed for big things. Looking ahead, I suspect that the company will generate strong profits in 2013 as the company's various initiatives start to pay off. To be fair, voice recognition is still in its early stages. However, I think this will work to the benefit of Nuance, given its proven track record and outstanding lead in the space.

Growth in new industries
Another bright spot for Nuance is that there is increasing demand for its products and services across various industries. For example, USAA recently agreed to license Nuance's new natural-language virtual assistant, known as Nina. The financial-services company plans to integrate Nina into its customer-service offerings as soon as next year.

A few more deals like this, and Nuance could see its profitability skyrocket in the coming year -- assuming management can keep its costs down. The voice-software expert also demonstrates strength in other areas, such as health care. In its fiscal third quarter, Nuance posted record sales of its Dragon Medical products. Moreover, Nuance CEO Paul Ricci expects momentum from the company's health-care segment to carry into fiscal 2013.

As we close out the current year, Nuance should continue to benefit from the fact that its technologies span a wide range of industries -- not to mention that many of these represent important growth markets, such as mobile. For the nine months ended June 30, Nuance increased total revenue by $231 million, expanded gross margins by 1.6%, and grew cash from operations by $72 million compared with the same period a year ago.

What's an investor to do?
I still believe Nuance is a good investment today, even though the stock has a sky-high P/E ratio and a beta north of 1. All told, I expect growth to continue for the company well into 2013, thanks to its lead position in key markets. I also suspect we'll see Nuance technology in future Apple products, perhaps even a next-generation iPad. Either way, you can now get an inside look at how to play the world's most valuable company, thanks to The Motley Fool's new premium research report on Apple. The report sheds light on key opportunities and risks facing Apple, as well as the highly anticipated iPhone 5. In addition, with the Fool's new research service you'll receive a full year of timely updates on the stock to help you make better investment decisions. Get started now.

Fool contributor Tamara Rutter owns shares of Apple. Follow her on Twitter, where she uses the handle @TamaraRutter, for more Foolish insights and investing advice. The Motley Fool owns shares of Microsoft and Apple. Motley Fool newsletter services have recommended buying shares of Apple, Nuance Communications, and Microsoft, creating a synthetic covered call position in Microsoft, and creating a bull call spread position in Apple. We Fools don't 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. The Motley Fool has a disclosure policy.


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  • Report this Comment On September 09, 2012, at 7:44 PM, GraphicBob wrote:

    Perhaps I skimmed this too quickly, but isn't Watson an IBM technology, not AT&T?

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