Dragon Is Here to Stay, But It Won't Save Hewlett-Packard

Dragon Is Here To Stay, But It Won't Save HP

Jan 13, 2014 at 7:00PM

Intel (NASDAQ:INTC) and Nuance (NASDAQ:NUAN) recently announced that they will work together to hard-wire voice-recognition capabilities into new Ultrabooks and notebooks powered by Core or Atom processors. This announcement, coupled with Nuance's development of powerful personal assistant software, will have a significant impact on the outlook for both companies.

As a large manufacturer, Hewlett-Packard (NYSE:HPQ) stands to benefit from this cooperation, but shareholders beware: HP is struggling to keep its head above water and is headed downhill fast.

What advances has Nuance made?
Nuance has long been known for its Dragon voice-to-text software, as well as Swype keyboard technology. Its newest offering, though, is a cut above both technologies. Dragon Assistant is a fully conversational personal assistant that is entirely integrated with the hardware of new Intel chips. It can be thought of as a much more powerful and accurate version of Siri that functions on laptops and tablets, rather than just mobile devices. The plan is to recreate human interaction as precisely as possible, so Dragon Assistant includes contextual dialogue abilities that allow users to talk normally while giving commands.

Intel worked closely with Nuance in the development of Dragon Assistant, and the ultimate goal is to create an immersive computing experience that mimics human speech and search abilities. Assistant is available both online and off. Users can take advantage of traditional speech-recognition software, as well as control their device with their voice alone.

What's Intel's gameplan?
Intel is throwing its muscle behind high-end ultrabooks. The integration of Dragon Assistant further benefits the immersive experience that Intel is trying to cultivate. Ultrabooks are a direct challenge to Apple's MacBooks, particularly the MacBook Air. The use of touchscreen technology in these machines is a plus over the MacBook, and they will only be augmented by the presence of Nuance's technology.

As prices fall, which they have begun to do -- many are marked well below $1,000 -- Ultrabooks will become more desirable. Intel has also put more work into its Atom chip, which powers mobile devices. This is indicative of the company's commitment to nontraditional computing markets, which gives it a strong position to work from. 

Where's HP right now?
HP is up about 140% from its low point last fall. Unfortunately, that's where the positives end: Fourth-quarter PC revenue was down 2% over the corresponding period in 2012, while printer revenue  -- long HP's cash cow -- fell 1%. Enterprise services fell 9%, and financial services fell 6%. Even software revenue was down 9%. This does not bode well for HP. The company was dropped from the Dow, but HP could drop clear from the ranks of the Silicon Valley giants.

Where are these companies headed?
Nuance's continued innovation is remarkable, and provides a strong base for the company. Its Swype technology has gained widespread acceptance as Android devices have become more prevalent, and it's reasonable to predict that the Dragon Assistant technology will grow as well.

One major risk for Nuance is the possibility that voice-recognition software might not garner common approval; the partnership with Intel is a big step toward mitigating this risk. If voice-recognition technology is integrated into the majority of PCs on the market, then there is little doubt that it will eventually become a fixture of computing.

On top of this, Nuance provides a lot of bang for the buck, as evidenced by a P/E ratio well below the sector average. Its forward PEG ratio is a little high at 2.17, but the growth estimates seem to be rather conservative. Nuance has strong growth potential in the short- and long-term.

Intel has begun to expand outside of traditional PC markets into tablets and ,while continuing to push the boundaries of conventional computing. It is reasonably priced at a P/E ratio about half the sector average. The partnership with Nuance will be parlayed into all types of personal computing devices, and -- in conjunction with increases in chip processing power -- will ensure that Intel posts gains.

Not such a bight future ahead
This brings us to HP, where the outlook is grim. Recent innovations have yet to stabilize the PC market, and it's anyone's guess as to the future of PCs. The Dragon Assistant technology should support sales as it becomes widespread, but it is doubtful that it will be enough to salvage a market that's shifting away from traditional computers. As such, HP can expect PC revenues to continue to fall.

It will take something big to revitalize the former giant. Right now, HP is looking at the potential of another year with no revenue growth. CEO Meg Whitman plans to cut 29,000 jobs by the end of the 2014 fiscal year, so stock prices might stay high in the short term. In the long run, though, HP is in big trouble. Jump ship before it's too late.

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Hunter Hillman has no position in any stocks mentioned. The Motley Fool recommends Intel and Nuance Communications. The Motley Fool owns shares of Intel and Nuance Communications. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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