Nuance Communications (NASDAQ:NUAN) has been flying high, riding the wave of voice-based interactions in devices. This is a clear trend, whether it be Siri, or even televisions embedding voice controls into new models.
Yet, with some of the opportunities facing Nuance also comes risks. We've compiled a "cheat sheet" on the main risks and opportunities facing the company in an an excerpt from our Nuance premium report. We hope you enjoy.
Three reasons to buy
- Nuance has the best and most comprehensive speech recognition engine in the world, working in over 60 languages and able to recognize local dialects, that it licenses out to a wide variety of enterprise customers for use in call centers and elsewhere. The company also implements biometric security, which customers highly value. This is a very scalable business, where Nuance enjoys a strong competitive advantage.
- There is a strong secular trend toward increased adoption of voice recognition, given improvements in the technology in recent years, particularly in the mobile and consumer space. Apple is a key customer here, especially as the company continues to integrate speech recognition throughout its product lineup, but Apple has also catalyzed adoption. Recent mobile OEM wins include HTC, Huawei, Kyocera, LG, Motorola, Nokia, Samsung, and ZTE.
- With the continued push toward electronic medical records, Nuance's strong position in health-care transcription services should see continued growth as the industry interacts with digital data. This is Nuance's biggest business, so growth here will greatly benefit overall results.
Three reasons to sell
- Nuance faces stiff competition from heavyweight tech giants, including Google, Microsoft, and IBM. Google gives away voice recognition technology that's integrated into Android, a threat to Nuance, although Nuance has withstood this threat well, because many Android OEMs -- many of which are listed above -- still license from it. These competitors have vast research and development budgets, but voice recognition isn't their primary business. Still, they can compete for the long haul.
- Tangible book value is very low due to a long history of acquisitions, which can make Nuance difficult to value. The company also amortizes a fair amount of intangible assets each quarter, deflating reported earnings. If goodwill and intangible assets need to be impaired, that would harm profits and investors.
- Since Nuance continuously acquires smaller companies, it has a constant need for capital. The company currently has $539.6 million in cash and equivalents on the balance sheet, which can't satiate CEO Paul Ricci's appetite for acquisitions. Raising more debt capital increases financial risk borne by shareholders, while raising equity capital dilutes them. In either case, the company must rely on credit and/or equity market conditions to dictate the terms at which it may access capital.
Fool contributor Evan Niu, CFA owns shares of Apple. The Motley Fool recommends Apple, Google, and Nuance Communications. The Motley Fool owns shares of Apple, Google, International Business Machines., Microsoft, 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.