Why Nuance Shares Got Crushed

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of speech-recognition software specialist Nuance Communications (NASDAQ: NUAN  ) plummeted 19% today after its quarterly results and guidance missed Wall street expectations.

So what: Nuance's disappointing third-quarter results -- adjusted EPS of $0.34 on revenue of $484 million versus the consensus of $0.40 and $516.5 million -- reinforce serious concerns over weak demand and rapidly intensifying competition. The dismal report also increases the likelihood that management will explore the possibility of a sale or that activist billionaire Carl Icahn -- who disclosed a 9.3% stake in Nuance earlier this month -- will begin shaking things up.

Now what: Management now sees third-quarter EPS of $0.30-$0.34, well below Wall Street's view of $0.49, and expects margins to fall 4 to 4.5 percentage points in 2013. "We have taken immediate corrective actions to improve the performance of our business and revised our operating plan accordingly," said Chairman and CEO Paul Ricci. "Despite short-term setbacks, we continued to make advancements in the quarter, earning design wins and new bookings in new strategic product areas including our automotive business and Nina solutions for customer care." More important, with the stock once again flirting with its 52-week lows and trading at a paltry forward P/E of 9, Nuance seems cheap enough to bet on that turnaround talk.  

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.

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9/27/2016 4:00 PM
NUAN $14.51 Up +0.12 +0.83%
Nuance Communicati… CAPS Rating: ****