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Will Nuance Communications Outperform in 2013?

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Nuance Communications (NASDAQ: NUAN  ) may be best known for its ties to Apple's (NASDAQ: AAPL  ) Siri technology. However, with the New Year now in full swing, the speech-software company is proving it's much more than a one-trick pony. Let's take a closer look at the opportunities and challenges facing Nuance in the year ahead, and how investors should play it.

Noise makers
Voice command technology is no longer limited by the basic functionality found in smartphones and tablet devices. Today, speech recognition software is catching on in a wide range of industries including payments processing, autos, and health care. As the market leader in voice-technology, Nuance Communications is ripe to profit from these trends.

More on this in a minute; but first let's see where the company stands in the consumer tech arena. Nuance predicts that virtual assistants will emerge as "the face of customer care across many industries " in 2013. This is an addressable market that the company is well positioned to capture, in no small part, thanks to Siri.

Apple launched its iPhone 4S last year with wild fanfare as a result of its Nuance-powered interactive personal assistant, Siri . As you might imagine, Siri's arrival on the scene revealed a strong demand for consumer voice recognition tools. Nuance seized the moment. Last summer, the company introduced Nina, a natural language mobile interface for use in the automated customer service space .

Nina, which stands for Nuance Interactive Natural Assistant, is a game changer for a few important reasons. Using natural language understanding, Nina can understand the context of what you ask her. Simply stated, she recognizes not only what you say, but also what you mean . Not to mention, the company's voice and touch services have shipped on more than six billion devices worldwide .

However, Nina's voice biometrics capability is perhaps its most impressive feature. The system's voice biometrics technology can verify a user or account holder simply by listening to his or her voice . Biometrics Research Group estimates that the U.S. banking sector spent at least $200 million on voice biometrics last year . Additionally, analysts expect this number to grow to more than $750 million by 2015 .

USAA started using Nina last August, and other banks and financial services companies have quickly followed suit -- integrating the technology into their various mobile customer service apps . Needless to say, Nuance's voice-driven platforms, including Siri and Nina, are undoubtedly changing the way we interact with our smartphones.

But Nuance hasn't stopped there. In fact, the company is unlocking new avenues of growth in other industries, such as health care.

New market opportunities
Nuance's push into the health care space has proven to be a smart move for the company. Nuance's  well-timed acquisitions in the space will help it take advantage of new government regulation, which requires that all U.S. hospitals ultimately make the switch from ICD-9 codes to ICD-10 codes . This creates a massive opportunity for Nuance, as the company helps more customers make the transition to electronic medical records.

To make this process easier, Nuance offers an educational webinar series with health-care focused topics such as "Top 10 ICD-10 transition steps for 2013 ." With the overwhelming pressures facing the health-care industry today, there has never been a better time for providers to start using Nuance technologies. As a result, I suspect the health-care industry will play a major role in Nuance's growth story for years to come.

Nuance clearly has a lot going for it these days. However, like any worthwhile stock, it isn't without risks.

The fine print
While the catalysts discussed above present significant opportunities for investors, it's equally important that you keep an active watch on the company's growing debt load. Nuance is a serial acquirer, in which it continuously gobbles up smaller competitors to grow its market dominance. More than this, Nuance doesn't mind debt-financing its growth through aquisitions , which can be a financial threat to a company and its shareholders.

Another risk is increased competition from rivals with deep pockets, such as Google and Microsoft. Both of these tech giants develop their own voice technologies in-house . If  you've ever used Microsoft's popular Xbox Kinect, then you know it can be controlled by voice commands. This is just one of many successful projects to come out of the Microsoft Speech Labs.

Even mobile carrier AT&T is getting in the game, with its speech application platform, known as Watson, which is now open to developers .

The takeaway
These factors undoubtedly add a layer of risk to shares of Nuance. Nevertheless, the company should be able to maintain its competitive advantage over rivals as voice-enabled applications start to play a more prominent role in our lives. This, combined with high-growth in the health-care space, should help the stock outperform the market in 2013.

Speech recognition is yet another nascent technology set to explode with the rise of tablets and smartphones, and no company is better poised to benefit from this coming boom than Nuance Communications. However, this growth story doesn't come without risks, too. The Motley Fool recently published a premium research report to break down what you absolutely have to understand before investing, so click here now to grab your copy today.

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