On the surface, Nuance Communications (NYSE: NUAN ) may not appear to be a bargain. The stock is up 60% so far this year and just checked in with Q4 results that included a net loss. However, when we take a closer look at the long-term prospects for this speech solutions company, I believe the recent 15% pullback in Nuance's stock price since the end of October presents Fools with an excellent opportunity to pick up shares of this two-time Motley Fool Hidden Gems recommendation on the cheap.
Although the price of Nuance shares has trailed off a bit since its earnings release on Thursday, there has been little in the way of new news that should give shareholders reason to worry. On the contrary, they have many reasons to be excited about the growth potential for this highflier.
As for Nuance's recent strides, one could not be more pleased. The company's organic revenue growth of 18% in Q4 highlights its operational savvy. This performance has been augmented by a series of strategic acquisitions, such as the company's recent purchase of Commissure, which will further bolster Nuance's Dictaphone health-care revenue stream. The company has also anchored a position of strong growth for the foreseeable future through expanding relationships with customers such as AT&T (NYSE: T ) , Bank of America (NYSE: BAC ) , Disney (NYSE: DIS ) , and WellPoint (NYSE: WLP ) .
Breaking down Nuance's business segments, signals are positive across the board. Its enterprise speech business has been booming, with Q4 organic revenue growth of 26% versus the prior year's quarter. The previously mentioned customers will play a central role in Nuance's future growth in this area. The company's health-care dictation and transcriptions business has also been eliciting positive vital signs. Now comprising about a third of the company's total revenues, this segment is coming off of a record quarter in which it inked extended-term deals with several of its important hospital customers.
Nuance's embedded speech business segment also continues to bustle. Though it only accounts for 14% of the company's total revenue, it presents tremendous upside potential as it experienced Q4 organic revenue growth of 43% versus the year-ago quarter. This improvement has been driven by the burgeoning demand for Nuance technology in handsets as well as personal and automotive navigation devices.
Nuance may also have another big card up its sleeve. In its Q4 conference call, Nuance CEO Paul Ricci noted that the company is in the early stages of working out a partnership with a "prominent Internet search firm" relating to voice-enabled mobile search applications. While this notion alone does not provide a strong basis to speculate in this stock, it could lead to significant capital appreciation for existing shareholders in subsequent quarters -- depending on what is ultimately revealed.
Nuance's growth through acquisitions does come with associated risks, but presently the company has been handling the transitions very smoothly. Year over year, the company's gross margins have remained steady at a level of approximately 66%. There has been very little in the way of concrete evidence that the company's numerous acquisitions in recent years will prove to have an adverse impact on its overall financial health. If anything, these pickups have allowed the company to further diversify its portfolio and span into areas of new growth.
There is no question that long-term shareholders of Nuance who have recently decided to take their profits on this stock have been handsomely rewarded. However, it is this very trend of profit-taking that has opened the door for new investors to get in on Nuance at a very reasonable price, given the company's long-term potential.