At The Motley Fool, we poke plenty of fun at Wall Street analysts and their endless cycle of upgrades, downgrades, and "initiating coverage at neutral." So you might think we'd be the last people to give virtual ink to such "news." And we would be -- if that were all we were doing.

But in "This Just In," we don't simply tell you what the analysts said. We'll also show you whether they know what they're talking about. To help, we've enlisted Motley Fool CAPS, our tool for rating stocks and analysts alike. With CAPS, we track the long-term performance of Wall Street's best and brightest -- and its worst and sorriest, too.

And speaking of the best ...
Few insults sting a company quite as badly as the one that Goldman Sachs hurled at Nuance Communications (Nasdaq: NUAN) yesterday. As Goldman put it, "Among our small-mid cap growth names in software ... we currently view Nuance as our least favorite." Ooh, burn. But what exactly makes Goldman hate Nuance so?

Actually, the analyst raised more than one objection. Probably the least convincing to long-term investors -- but the one that has the most potential to cause an "earnings miss" when Nuance reports its Q4 results next week -- is Nuance's move toward a "subscription-based" revenue model. In the short term, Nuance could sacrifice big licensing profit margins to lock customers into subscription contracts, crimping this quarter's earnings. Longer-term, however, subscription models are often considered a good thing, providing improved "visibility" into a company's likely future earnings.

I'm more concerned by Goldman's observation that Nuance is starting to encounter "significant competition and monetization challenges" in mobile computing. As an investor in SanDisk (Nasdaq: SNDK) or short-seller of Western Digital (NYSE: WDC) will surely tell you, mobile is the future of computing. The consumer shift from PCs to smartphones is basically the whole reason why flash memory maker SanDisk's stock has risen nearly 80% over the past year, while PC-intensive hard drive maker Western Digital has seen its stock slide 10%. If Nuance is starting to stumble in this key area of growth, that would be worrisome -- both long-term and short-term.

Let's go to the tape
That worry only grows stronger when I examine Goldman's record in the "Communications Equipment" industry. With 71% of Goldman's active recommendations in this industry currently outperforming the market, the analyst might know what it's talking about here:


Goldman Said:

CAPS says:

Goldman's Picks Beating S&P By:

Aruba Networks Outperform ** 94 points
Qualcomm (Nasdaq: QCOM) Outperform **** 25 points
Research In Motion (Nasdaq: RIMM) Underperform ** 18 points

Here be Dragons
I've expressed plenty of reservations about Nuance's stock price in the past. With no profits to speak of, and selling for 22 times free cash flow, Nuance still looks "too expensive" to me. But I never worried about its competition.

Dragon Naturally Speaking -- Nuance's signature software product -- has always seemed to me the dominant force in turning text on a screen into speech, and vice versa. But with Goldman's warning in hand, I've noticed that there are competitors now threatening to slay Nuance's Dragon. They range in size from tiny iSpeech all the way up to AT&T (NYSE: T) and its "Natural Voices" project.

Foolish final thought
Admittedly, to find these competitors, I did have to find inspiration from Goldman to seek them out. They're obviously not high-profile enough to make headway against Nuance yet. Meanwhile, Nuance still has plenty of momentum in the mobile space, selling its Dragon software on leading mobile computing gadgets such as the iPad and RiM's BlackBerry.

That said, I take the looming threat from AT&T especially seriously. The telecom giant has a huge interest in commercializing its own text-to-speech product. Unlike many start-ups, it's got the financial wherewithal to go head-to-head with Nuance in the R&D game -- and good incentive to do so. As a Nuance customer, success will save AT&T money. Plus, as a primary purveyor of the iPhone and iPad, bundling a text-to-speech product into its i-Services could give AT&T a competitive advantage over Verizon (NYSE: VZ).

If Nuance were selling for a price low enough to incorporate these risks, I might be willing to buy it. But with Nuance still priced as high as it is today, I'd be more inclined to follow Goldman's advice and sell.

Nuance Communications is a Motley Fool Stock Advisor recommendation and a Motley Fool Hidden Gems selection. The Fool owns shares of Qualcomm and Western Digital.

Fool contributor Rich Smith owns shares of Google. You can find him on CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked No. 698 out of more than 170,000 members. 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.