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Nuance higher following M&A rumors, Deutsche note

  • M&A rumors are once more giving Nuance (NUAN +2.1%) a lift. Such rumors have popped up occasionally since Carl Icahn, who now has a 17% stake in Nuance and two board seats, disclosed a position in the company in April.
  • Also: Deutsche is arguing Nuance's 30% YTD pullback translates into a buying opportunity, and that the voice recognition software leader's FQ4 report (due Nov. 25) could act as a turning point.
  • 6% of the float was shorted as of Oct. 15.
Comments (10)
  • "pullback translates into a buying opportunity"

     

    Agreed. Bargains are getting harder and harder to find in this bull market, but this one is easy, voice recognition market is going to be growing quickly in the mobile/consumer segment and NUAN is the market leader and counts Amazon, Apple, Ford, HTC, Hyundai, Intel, Lear, Motorola, OnStar, Samsung, Subaru, Toyota among others as customers, and while this is growing they have a nice cash cow/near monopoly in the healthcare segment. Enterprise (virtual assistants for banking, insurance, etc) is going to grow from here as well. Forward P/E of 11 right now! For a tech/growth industry, shares currently pricing in what is merely a somewhat misunderstood transition to SaaS pricing and negative momentum traders getting out. Golden opportunity! This is going to be a good stock going forward, could be a nice 3-6x from here (my wide range is caused by uncertainty with Apple/Siri, rumor is they are wanting to do their own VR in-house, I don't think they will be able to for some time, but NUAN downside is protected with their other growing revenue streams).
    4 Nov 2013, 04:15 PM Reply Like
  • Any idea why it dropped so much recently?
    4 Nov 2013, 06:57 PM Reply Like
  • No news, but here's a theory. The stock has had quite a run over the past decade, then got over-bought on Apple buy-out rumors that never materialized (Apple uses Nuance for the speech recognition part of Siri). Then the stock slid failing to keep up with the general market over the past 2 years and some have tired of waiting for the promise of big profits from a transition to talking to our machines (a theme that has been around for years, and easily imagined by anyone with even mild exposure to sci fi!). The recent slide prompted more to bail, making for this buying opportunity. If you are concerned I'm missing something (quite possible) then wait 3 more weeks for earnings on 11/25, but I think the shares may have recovered a good portion of this slide by then, from my look the shares are severely discounted right now.

     

    Some cons to consider is NUAN is really a somewhat cobbled collection of acquisitions, though it has allowed them to dominate the market by buying competitors, some through IP/legal battles. With all these acquisitions they carry a decent amount of debt, though I consider it manageable. Also Carl Icahn now has 2 board seats which could be a large distraction for management, and also they have a fierce competitor in Google, though if speech recognition takes off to the extent I think it will, the market will grow plenty to accommodate the competition, there are also many customers that won't want to license from Google for competitive purposes. It may also be confirmed that Apple is trying to build an in-house speech recognition capability, I personally think this would be a mistake for Apple and put them further behind Google, but I certainly don't chat with Tim Cook too often!

     

    Another potential buyer that might make more sense is IBM as speech rec is more of a B2B market where they have more experience, but with cars that respond to our commands becoming almost standard/exploding in popularity, voice commanded TVs/set-top-boxes, automated call centers, personal assistants, voice biometrics ("my voice is my password"), continued use of medical record dictation/electronic records as boomers age (NUAN owns this market) there is just a lot of opportunity beyond Apple/Siri.
    4 Nov 2013, 07:33 PM Reply Like
  • I'm holding onto it and added more at just over $16. I'm holding onto the hope that something will happen now that Icahn is finally on the board, else I might've left it.

     

    I also believe that voice is the next big thing because that just seems to be a natural progression to making things more intuitive.

     

    One big concern is if Google cuts into NUAN's healthcare pie. Also, it was a shame that Carl couldn't get Dell, that would've certainly supported his cause.

     

    Good luck!
    4 Nov 2013, 07:50 PM Reply Like
  • I don't think you'll regret that @LongSIRI, though there may be more short term pain before we get there. I've got a bit of "dry powder" and plan to add more after earnings depending on the news, I'll admit I'm having a hard time holding myself back! I really do think that the stock is selling off because someone w a big stake wanted (needed?) out, shares took a hit on a slow volume day and now everyone thinks someone else knows something they don't, aka a panic! Be greedy when others are fearful!
    4 Nov 2013, 10:44 PM Reply Like
  • Many of their customers are developing own competitive products.
    4 Nov 2013, 07:41 PM Reply Like
  • True, but most are small, and VR is not so easily done. Not to mention intellectual property, NUAN is ruthless when it comes to turf wars, they acquired Vlingo after threatening destruction in repeated court battles.
    http://tcrn.ch/1hJ00gM
    'Vlingo CEO Grannan once referred to competing with Nuance as “having a venereal disease that’s in remission”.'

     

    The big one is of course Google, and from my own experience with voice activated search I think their VR is very good, maybe better than NUAN, but Google has a lot of enemies these days! I personally think an Apple acquisition of NUAN is a no-brainer (Carl Icahn agrees, lol), but Apple doesn't always do the right thing, shying away from big acquisitions, preferring to develop in-house, even if it is inferior to competitors: iTunes Radio, iAd, Apple Maps, etc, though they are learning. Take the Apple maps debacle, for example, wars are heating up with Google buying Waze, Apple buying Embark. I think voice recognition and personal digital assistants that have a brain are going to be the next thing we are going to expect from our phones. Siri and Google Now are only the beginning, Amazon bought startup Evi, NUAN has Wintermute, MSFT has Cortana. But it will hardly be a winner take all as different demographics will relate to different personality assistants (Siri's kinda snarky/bitchy sometimes! lol).
    4 Nov 2013, 10:38 PM Reply Like
  • dgulick -- I agree with most of what you say, and am also buying more NUAN at these prices. But I'd like to ask whether your statement that Icahn advocates a buyout by Apple is based on any source that isn't sheer blogger speculation. Like the rumor that Apple's new office in Cambridge was opened for the purpose of replacing Nuance, I have only seen this rumor floated initially as speculation and thereafter as fact by people quoting the speculators. I don't believe either is likely.
    5 Nov 2013, 12:54 AM Reply Like
  • Well, grabbing 2 board seats is far from a "passive" NUAN investor stance, and he simultaneously increased his AAPL position to the point where he is having a little bromance with Tim Cook. And I think most would agree, we are talking about *The* activist investor of the last half century! (carving Motorola out for Google was no small feat!) But yes, I haven't seen anything official beyond, as you put it, "blogger speculation". Same for the Apple Boston office, but it's very similar to how Google got started in building it's own Voice Rec capability (i.e., hiring NUAN employees away).
    5 Nov 2013, 11:54 AM Reply Like
  • Okay, fair enough. I just think we'd all be better informed as investors if commentators would express ideas with a more precise degree of authority/certainty. There's nothing wrong with speculating as long as it's framed as speculation.

     

    The large flaw I see in the thinking that an Apple/Nuance acquisition is a 'no brainer' is that (a) if it were really a no-brainer, Apple would have acquired them a few years ago, and (b) more importantly, Apple as far as I've seen acquires companies with a specific technology that would be comfortably "swallowed whole" by Apple and incorporated in their business operations. You don't hear about Apple-owned business arms providing services to other companies outside the circle of Apple products. As you point out, Nuance has an enormous part of their business devoted to providing medical transcription and encoding services to hospitals and providing oem's with CR / NLP services -- I don't see Apple maintaining this whole segment of activity, and I doubt it would make sense to spin-off such a division given the centrality of the tech patents to all areas of Nuance's work.

     

    I'd love to see Apple buy NEST (thermostats and smoke alarms) -- it's not publicly traded, but you could just put an Apple logo on their products as-is and they would fit right in.

     

    Anyway, I share your optimism about Nuance as a business. I think investors are worrying more about whether shareholders will get a fair piece of the pie -- or whether management will continue to soak up excess value for themselves through heavy stock options (share dilution). I think there's a lot of worry that Nuance might turn out to be a "great company, lousy stock." If Icahn can do something to discourage ongoing shareholder dilution, that would be great.
    5 Nov 2013, 01:59 PM Reply Like
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