Nuance Plunges: Time to Panic or to Buy?

There's nothing subtle about this market reaction.

Shares of Nuance Communications (NASDAQ: NUAN  ) took a 19% dive on Friday, following the release of first-quarter results. Sales jumped 28% year over year to $462 million, but fell short of Wall Street's $490 million target. On the bottom line, non-GAAP earnings increased by a penny per share, landing at $0.35. That was just short of analysts' $0.36 EPS estimates.

Adding to Nuance's pain, revenue guidance for the second quarter was roughly in line with the analyst consensus, but earnings targets came up short. And even if Nuance hits the top end of its full-year targets, it'll still miss the Street's average numbers.

CEO Paul Ricci explained that European sales are sagging under another round of macroeconomic worries. North America is doing alright, particularly in the enterprise segment. In Asia, mobile deals kept the train rolling. And Ricci pointed out that the current quarter seems a little extra risky compared to the full year, because several large orders in his pipeline may or may not close by the end of this period. But he does expect them to materialize before the end of the year.

This stock has been riding the mighty coattails of Apple (NASDAQ: AAPL  ) since the iPhone 4S turned out to have Nuance technology inside the Siri personal assistant feature. But Cupertino giveth, and Cupertino taketh away. At least partly, thanks to Apple's slowing smartphone growth, Nuance shares had fallen 16% over the last year before this report, and 32% today.

I don't think that's a totally fair reaction. Nuance sells voice and character recognition tools not only to other mobile computing giants, but also to a number of completely different sectors. This helps sales and earnings achieve steady climbs in the long term, even if share prices don't always follow suit.

NUAN Chart

NUAN data by YCharts

Health-care sales are growing faster than mobile revenue, and already dwarf the mobile division, with 64% higher sales. In the last three years, no single customer of any kind has accounted for more than 10% of Nuance's sales. Nope, not even Apple.

So, Nuance is much more diverse than many investors give it credit for, and hooked into the health-care megatrend in a big way. If management takes a conservative tack on guidance due to macroeconomic softness, I don't see how that's a bad thing. My bullish long-term CAPScall on this stock isn't going away today. In fact, this looks more like a buy-in window than a signal to panic and sell.

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 investors interested in Nuance absolutely have to understand before investing, so click here now to grab your copy today.


Read/Post Comments (4) | Recommend This Article (13)

Comments from our Foolish Readers

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  • Report this Comment On February 08, 2013, at 7:56 PM, gbarney2u wrote:

    I was making money before joining Motley Fools but with too much trading and too much taxes. With Advisor advicein Jan I bought 1,000 shares of Nuan and 1000 of WSM so I'm out about $4K+ today. They then advise me I can do better by joining Supernova another $3K for 3yr, and I bought 200 share of NOV @ $72.50; now around $69. Now they are suggesting I should add something called Pro to my service. Where does the selling end and making money begin? I expect if they would have told me to buy NFLX in Jan and LNDK in Feb I would be elated .I never been out so much money so quick.

  • Report this Comment On February 08, 2013, at 9:24 PM, jmlerche wrote:

    Check out John Carters' book "Mastering the Trade" I've made more money 'trading' than 'investing'... not a ton, but I can say I've had better success since reading that book than buying and holding recommendations of any service. That said, this is one of the best 'ideas' type websites I've been a member of and will continue to be a member.

  • Report this Comment On February 09, 2013, at 4:04 PM, bobbyk1 wrote:

    I hold posistions in about 30 stocks so my 2 1/2 posistion in NUAN didnt kill me.To pick out a couple losers is sour grapes.My gains in NXPI.TSLA,WAB more than made up for NUAN losses.To expect every Fool pick to win is naive.

  • Report this Comment On February 10, 2013, at 12:16 AM, BoxinTheCompass wrote:

    Interesting to note motley pushes this stock but I think only one person on their staff owns it. If its so good then why is that the case?

    So the graph above looks intriguing, revenue is ok, price went down. So they don't appear to be going out of business soon... may just be a bunch of mamsy pamsy

    Since I will be long on this I bought (it is buy low, sell high?, so right about now I think that buy low action should be in place)....we'll see by end of summer/fall what gives and whether I am indeed a motley fool

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