Why Microsoft Wants to Buy Nuance

In its second-biggest acquisition ever, Microsoft (MSFT -1.27%) plans to buy Nuance Communications (NUAN) in a deal worth $16 billion. Also, March ended up being a record month for Uber (UBER -2.94%). In this episode of MarketFoolery, host Chris Hill and Motley Fool analyst Jason Moser analyze those stories and discuss reasons for not investing in certain companies.

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This video was recorded on April 12, 2021.

Chris Hill: It's Monday, April 12th. Welcome to MarketFoolery. I'm Chris Hill. With me today, Jason Moser. Thanks for being here.

Jason Moser: Well, always a pleasure to be here, man.

Hill: We've got news from Uber. We're going to explore the little things that guide our investment decisions, but we're going to start with the deal of the day. Microsoft is buying Nuance Communications, a speech recognition company, in a deal worth $16 billion. This makes it the second largest acquisition Microsoft has ever made. CEO Satya Nadella said that they're going to use Nuance's technology in Microsoft's healthcare Cloud products. We'll get to the business of Nuance in a moment, but this just seems like one of those deals where they wanted the tech, they had the money, and they went out and got it.

Moser: [laughs] I think you've pretty much wrapped it up there. Next story, Chris. [laughs] I'm just kidding. Of course we're going to dig into it a little bit, but I do feel like that really is it in a nutshell. I mean, to me, Nuance has been a very interesting company to follow over the last decade or so. Because when you think of the technology, the voice recognition technology, it seemed like it was really a bit ahead of its time for a while. Perhaps that's why shares really didn't do much. I mean, over the course of the last decade, really, shares haven't done much at all until fairly recently. I think in looking at the bigger picture here to me, it always felt like Nuance was going to be a prime acquisition target. Then when we saw the Cerence spin-off back in October of 2019, remember, Cerence was the part of the business, the automotive part of the business. Once they spun that off in 2019, to me, that really was the writing on the wall there. It felt like they were getting this business in shape to try to figure out if it could be something part of something a little bit bigger. 

Microsoft has a lot of different ways they can plug this technology into their model. They can distribute it far and wide. I absolutely understand the healthcare interest there. I mean, that really is the gist of Nuance's business today. It's somewhere in the neighborhood of 62% of total sales in 2020 was from their healthcare segment. Listen, healthcare is going virtual. I mean, telemedicine, digital. Healthcare is one of the markets that is becoming disrupted as technology continues to roll out. I definitely see Microsoft's interest in this. It is interesting as well that they are paying up for it because this deal values it at around 68 times projected cash flow. That's not cheap, but we are in a period of time where it doesn't feel like much of anything is cheap. Perhaps that was just the dangling offer there that they just really couldn't refuse, it would be difficult for anyone else to come in and compete with.

Hill: I think you're right about that. Nuance made $7 million in the fourth quarter of 2020.

Moser: Yeah.

Hill: That was their profit, $7 million with an M against revenue of basically $350 million. This was, as I said earlier, they wanted the tech. This was that holy cow, what a profitable business, and we can just lever that up when we bring them into the Microsoft ecosystem. It really did seem like they just wanted to get this deal done. Again, they've got the cash.

Moser: They do. I mean, when you look at the companies that Nuance itself really goes up against, their healthcare segment alone competes against Optum, Amazon, Google [Alphabet], 3M. I mean, think about those businesses right there. I mean, Optum, of course, being a part of UnitedHealth. I mean, those are massive, massive competitors. Then the enterprise segment, which is the other part of Nuance's business. I mean, they're competing against companies like Amazon, Google, smaller companies like LivePerson, which I would argue, I've had the opportunity to interview LivePerson CEO and founder Rob LoCascio a number of times. Really great stuff that they're doing with that business as well. They're going up against companies like Salesforce. It's very easy to see. Nuance is going up against some very, very well-funded, strong businesses that have made a lot of progress in the space. I think it absolutely makes sense to have Nuance as a part of something bigger. 

This will give Microsoft a chance to really exploit what is pretty good technology. I just don't know that Nuance has ever really been in the position to fully unlock the value there. [...] what, $16 billion. It's got $131 billion in cash and equivalents on the balance sheet. I mean, this is an acquisition that's going to go so under the radar. I don't think it's going to be one of those acquisitions that they end up having to write-off later down the road either. I think they will actually be able to do some pretty productive stuff with this.

Hill: Shares of Uber are up 4% this morning after the company said it posted record gross bookings in the month of March. If you're looking for yet another data point that the world is opening back up, certainly the United States is opening back up, Uber provides a pretty good one.

Moser: Yes. I mean, if you look at the numbers, Uber clearly is a business that has been suffering as of late due to obvious reasons. You go back to the most recent quarterly results, that would've been their fourth quarter for the end of 2020. Their monthly active platform consumers, that MAPC metric, report down 16%, trips down 24%, revenue down 15%. I mean, it's a business that overall has been having some issues. Now, thank goodness for delivery. I mean, deliveries have been a real bright spot for a few different businesses out there, and Uber is no exception there. Those numbers have been tremendous with bookings up 128%, revenue in the delivery segment up 220%. That's really helped this business weather the storm for its core offering, and to see that the core offering seems to be coming back around, I think really encouraging. 

They are also going to be spending their own version of stimulus. They are going to have their own little version of their own little stimulus program. Investing $250 million into their driving force, getting drivers back on the road, working for drivers that have already been with the company for a while, working with new drivers to help them see the light at the end of the tunnel, working for the company as well. I mean, this is good to see, this is good to see. It's not surprising. It's really good to see. The longer-term question probably still is in regard to self-driving technology. What does that do for a business like this versus the workforce? I mean, I think if you are an investor in Uber, you're probably thinking, well, self-driving is the clearest way to get this company to be profitable. That's probably still going to be a little while away though. The company itself thinks they can actually become profitable by the end of this year on an adjusted basis. I mean, Chris, can't we all a little bit become profitable?

Hill: I was just going to say.

Moser: If we just make a few adjustments, I think we could all become profitable.

Hill: Yeah, I can be profitable on an adjusted basis.

Moser: We just got to make an adjustment here and there, man.

Hill: They lost, and I know it was a bad year. But they lost close to $7 billion last year. It is one of those things that pushes back the goalpost a little bit further for Uber in terms of, well, when are they going to be not just adjusted profitable, legitimately profitable.

Moser: Yeah.

Hill: Our email address is [email protected]. A great note from Eric Potter. He writes, "Thanks for consistently making investing a pleasant part of my day. A wonderful aspect of being an individual investor is you don't have to justify your investing decisions to anyone but yourself. But should you? I asked because in a recent episode, you talked about the homebuilding company, Lennar (NYSE: LEN). I started checking them out. Financials look good. Company mission sounds great. Then I read the shareholder letter. In the first paragraph, there are two missing hyphens, three unnecessary capitalizations, and a conjunction whose presence defies logic and reasons. [laughs] It makes my eyes hurt. I'm tempted to cross them off my watchlist, but before I do, I just wanted to ask, what is the reason that would make you not buy a company, that if you set it out loud, most people would think it is ridiculous?" 

First of all, Eric, welcome. Welcome to being an investor. [laughs] I love this question because I think a lot of us have been here. I don't think you need to be an investor that long to come up with a not particularly material reason to not invest in a business. I know I've been there. Now, it had nothing to do with grammar, but I've absolutely had stocks where I just didn't pull the trigger on them and I'm not going to name names. But it basically boiled down to the person running the company, and I just thought that I like that guy. [laughs] Let me be clear, Jason. I think he's terrible to his employees, I think he's crooked, I think something shady is going. No, no, no. I think if I was in an elevator with that guy and it's just the two of us, that would be hell. [laughs] Again, not a great reason, but I've been there.

Moser: Well, it's a great enough reason for you. Eric, generally, the older I get, the more I agree. It's like you can justify your investing decisions to yourself. I mean, if someone disagrees, you could just smile politely and say, "Okay, that's great," and just move on. I think I heard a while back, I think it was Keanu Reeves I heard say something like, he'd hit the stage of his life where he doesn't have time to argue with people anymore. So if someone came to him and said, "You know what? 2 + 2 = 5," he'd be like, "Okay, that's great. You have a nice day," [laughs] and just keep on moving. [laughs] Yeah. I can certainly understand investing because at the end of the day, that really is the core of investing, right? It's one big disagreement. You've got buyers and you've got sellers and both parties think they're right for whatever reason. So we all need to figure out our own process, what matters to us, the red flags. 

This was an interesting question to me. It was a fun question to deliberate because I don't know. When you come up with reasons why you might not invest in a company but if you say it out loud, then it sounds absurd, but it doesn't sound absurd to you. I feel like there are some things out there where I would say, I don't know. Maybe if a company has a really cheesy mission statement, that's where I feel like, "All right. Man, you're taking yourselves a little bit too seriously. You're thinking you're changing the world, when you're just doing this one thing." But if the mission statement is over the top, that at least is a sign to me to look a little bit deeper into what kind of people are running the show. I think the more time goes on, I think this becomes a more common place. If you can look through the CEO's Twitter feed and if it just seems a stupid Twitter feed, you're asking yourself questions, "Why does this person tweet this?" I know, let's go ahead and just open up the hate mail now. This is @TMFJMo, so you can just rip me for this one. But like Elon Musk, I follow him on Twitter. Honestly, he's more entertaining than anything else. But if you go through that guy's Twitter feed, it's like, "Really?" Given everything that you're doing, it feels like maybe you don't have a lot of time. But based on your Twitter feed, not only do you have a lot of time, you apparently have a lot of time to waste, thinking about some really dumb stuff. So I don't know. 

I look at that and I think I don't know exactly where that guy's head is at. But if I'm going off just his Twitter feed, I don't know that I necessarily want to be putting my money behind him. I just opt to not do it at this point, and that's fine. You got to make your own decisions. Another question we would ask, and we learned this one at the very beginning stages when I got here at The Fool, when I was going through the Analyst Development Program. A question to ask yourself, "Would I trust the CEO to babysit my kids?" If you asked that question out loud, people will probably wonder what you were saying. Why does that even matter? But it's an interesting way to frame things. Do you trust the CEO to babysit your kids? Then one final one, and I will say this one. I know this probably holds a place close to your heart as well. But when you start making up your own metrics to make it seem clever or seem entirely specific to your business when the reality is that's not the case, that's when I just start losing patience, man. Groupon (NASDAQ: GRPN) was a very obvious one. We had a lot of fun ripping on them for what was an adjusted consolidated segment operating income or something like that. It was the most non-GAAP of non-GAAP metrics ever, and that was like, "All right. What are you guys really trying to show here?" Then I'd honestly even say that Shake Shack's same Shack sales puts me a little bit on tilt, too, man. When I read that, it's like, "What?" Then when you try to say it, I mean, try to say that three times fast.

Hill: It's one of the reasons I don't like it.

Moser: [laughs] I agree. I just don't like it. For me, it's like I don't even want to have to entertain the idea of saying it. So I don't know. I see those kinds of things and they just make me wonder, but it's a fun question to think about.

Hill: The metric you mentioned with Groupon, am I remembering correctly that Groupon put that in their S-1 filing?

Moser: Fairly certainly did. They may have even put it in an earnings release.

Hill: But I think that was when they were filing to go public they put that in there.

Moser: Yeah.

Hill: That was the thing where, at Fool HQ, we're like, "What is this? This is completely made up. Also, it's your S-1. [laughs] What are you doing? Why are you putting this in your S-1?"

Moser: Yeah. Well, I'll give them a little bit of leeway in that they were trying to frame it as that clear path toward profitability, right? With businesses that go public, and typically they aren't profitable in this day and age. So they were trying at least to paint that path for profitability. Had they waited five or seven years and gone public a little bit later, the market probably would've been a little bit more tolerant of their poor financials. They could have just used regular old accounting language to try to convince us of the metrics that matter the most. But at the time, boy, I think we all read that. I'm certain we had fun with it on at least a couple of episodes of MarketFoolery, I'm sure.

Hill: Jason Moser, great talking to you. Thanks for being here.

Moser: You got it. Thank you.

Hill: As always, people on the program may have interest in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. That's going to do it for this edition of MarketFoolery. The show is mixed by Dan Boyd. I'm Chris Hill. Thanks for listening. We'll see you tomorrow.