In the first week of September, Nuance (NUAN) announced that its voice and language technology will be featured in the recently launched Samsung (OTC:SSNLF) devices as the S-Voice. These devices are its smart watch, Galaxy Gear, and the latest version of the note series, Samsung Galaxy Note 3. The smart watch represents the first ever use of Nuance's voice and intelligent systems-based technology, which is installed on the wearable computing device.
The sales of these products are expected to start from the first week of October through various network providers like AT&T (T), Sprint (S), and Verizon (VZ). Last year, with the launch of Galaxy Note 2, the company posted sales of over 5 million units worldwide within the initial two months post launch. With improved specifications and quality, we expect the company to show even better performance in terms of sales this year. Meanwhile, Galaxy Gear will attract only a certain set of customers. Though the smart watch industry is growing at a high rate, this year there would be a nominal business. Based on ABI research reports, this industry is expected to sell around 1.2 million smart watches globally this year, with future growth projected to be over twenty-fold in the coming two years.
This will indirectly expand the landscape of devices for Nuance's cloud service business. We believe Nuance will still benefit as its voice technology is compensated based on usage, unlike the per device license revenue model. Although not many sales are expected, the improved functionality of the S-Voice will attract more mobile users to take advantage of the app.
Not a piece of cake this time for Samsung
In comparison to last year, this year Samsung won't find it easy to maintain its market share in the smartphone industry. Sony (SNE) has launched two products, Sony Xperia Z1, and Sony SmartWatch 2, directly competing with the above Samsung devices. The Xperia Z, which is the predecessor of Xperia Z1, posted great results post launch. The smartphone recorded sales of 4.6 million units in just 40 days of its launch. Its features are a 5-inch Full HD screen, waterproofing, and a 20 megapixel camera. Sony launched SmartWatch 2 with tons of improvements compared to the previous one. It will have features like waterproofing, longer battery life than Galaxy Gear, and is priced cheaper. In support, Sony and other developers have already created over 200 apps for this device, making the product extremely competitive.
The Apple threat
Earlier, there was news of Apple (AAPL) secretly assigning a team to further develop its Siri voice technology, which is currently provided by Nuance. After investor Icahn's tweet on August 22, regarding his conversation with Apple's CEO Tim Cook, things have totally changed.
"Spoke to Tim. Planning dinner in September. Tim believes in buyback and is doing one. What will be discussed is magnitude." - Carl Icahn (@Carl_C_Icahn)
In addition to the buyback plans, there is a huge possibility of talks, or 'magnitude' as described in the tweet, regarding Apple acquiring Nuance in the near future.
This can happen based on Mr. Icahn's 16.4% stake in Nuance; he is also one of the major stakeholders in Apple. It is said that he might force Apple to acquire Nuance, since he finds the company presently undervalued. Mr. Icahn finds this deal lucrative for Apple, knowing that Apple is a strong believer in this technology, and it uses Nuance's technology in the much appreciated personal voice-assistant 'Siri'. Additionally, Apple was the first mobile manufacturing company to bring in such an advanced voice-assistant application that would actually help navigate, place reminders, and also search the web for any subject. Today, Siri has continued to advance with the latest version of iOS.
The deal wouldn't be a huge burden for Apple given its cash pile of $150 billion, as of its third quarter of fiscal year 2013, and Nuance being valued at $7 billion.
What brought us more confidence regarding this acquisition possibility was Nuance's reaction towards Mr. Ichan's strategy of increasing his stake further to 20%. In order to prevent any hostile takeover situation, Nuance adopted the 'poison pill' strategy. Through this strategy, the company offers its shareholders the right to purchase shares at discounted rates, indirectly stopping an individual, or a company, from gaining control over the targeted company.
Voice is considered the future in technology, with its growing importance in almost all sectors. Given the brand name, and clientele of Nuance, Apple won't leave this opportunity if this comes to it, considering the growing popularity of Siri technology installed on its products. Also, it needs to compete with Samsung's S-Voice, which has progressed significantly, despite a late arrival in the industry compared to iPhone's Siri. In order to compete against Samsung's growing market share around the globe in the mobile industry, Apple will always have to continue to show innovation in this software, being its USP, and this will help in further growing its market share too.
Perfect moment to buy
This stock is presently undervalued based on its price-to-book ratio at 2.26 times, which is lower than the industry standard of 25.1 times. Given the fundamentals, we expect the enterprise segment of Nuance to continue its growth at more improved rates in the coming quarters. Additionally, once the smart watches or wearable devices go mainstream, it will provide meaningful impact to the company over time, based on its forecasted growth. Since the news of a hostile takeover possibility, Nuance's stock price has remained stagnant from its previous downward trend on the year-to-date basis. This indirectly shows shareholders' support of the possible event, as the acquiring company is one of the most admired brands in the technology industry.
Additional disclosure: Fusion Research is a team of equity analysts. This article was written by Rohit Gupta, one of our research analysts. We did not receive compensation for this article (other than from Seeking Alpha), and we have no business relationship with any company whose stock is mentioned in this article.