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Why Cerence Stock Popped to Record Highs

By Evan Niu, CFA – Jun 1, 2020 at 2:51PM

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Cowen boosted its price target on Cerence, citing the rise of connected cars.

What happened

Shares of Cerence (CRNC -3.61%) have popped to record highs today, up by 16% as of 1:40 p.m. EDT, after getting an upgrade from Wall Street. The maker of automotive virtual assistants is expected to benefit from the ongoing shift to connected cars.

So what

Cowen analyst Jeffrey Osborne boosted his price target on Cerence shares from $28 to $39, which represents 30% upside compared to Friday's close, while reiterating an outperform rating. While automotive purchase and upgrade cycles tend to be longer, an increasing number of new cars incorporate 3G and 4G cellular connectivity, which will inevitably evolve into 5G connectivity.

Green stock chart going up

Image source: Getty Images.

"We see Cerence driving continued strength in its financial performance given secular trends in connected cars incorporating voice capability," Osborne wrote in a research note to investors.

Now what

The tech company's business will rely on monetizing vehicles using its Car Life software-as-a-service (SaaS) platform to generate recurring revenue. Introduced earlier this year, Car Life is comprised of various tools that use artificial intelligence (AI) to assist drivers in a variety of ways, such as learning new features, setting service appointments, and enabling voice interactions with infotainment systems, among others.

Cerence recently refinanced much of its debt with a convertible senior note offering that should generate interest expense savings.

Cowen's price target is based on a 10x multiple of 2022 estimated EBITDA of $160 million. That notably represents a discount compared to other small-cap software peers, Osborne adds.

Evan Niu, CFA has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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