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Riding High In April, Shot Down In May: Nuance Communications And Ruckus Wireless

|Includes: Nuance Communications, Inc. (NUAN), RKUS

I've covered Nuance Communications (NASDAQ:NUAN) and Ruckus Wirleless (NYSE:RKUS) in previous posts. My last focus article on Nuance Communications concentrated on their Analyst/Investor Day presentation back in December of 2012. For Ruckus Wireless, I wrote about their inaugural conference call three short months ago. I liked both company's prospects, but they traded too high for my investing style at the time of the writing. Circumstances changed when both companies recently reported quarters that didn't live up to Wall Street expectations. As shares fell, I put my money where my mouth is, and took stakes in both companies.

Ruckus Wireless

Although Ruckus Wireless has been around for over ten years, it's only been a public company for six months. It closed today at $13.40/share, and the WiFi plumbing provider is basically back to square one to when the underwriters valued the stock between $13-$15 for its IPO late last year. Although it closed under the IPO price after the first day of trading, the stock shot up to $26.50 its first few months on the market. Two months ago when Ruckus was trading at $24, I put a $16 limit order on it, then waited.

Be careful what you wish for. After missing Q1 earnings estimates, and guiding down for Q2 (a traditionally strong quarter for the company), the stock crashed through my initial offering, and I was stuck with shares at $15. Picked up more at $13.40, so my average cost is somewhere in the low $14 range. I'm not sure if this is like trying to catch a falling knife, but there's another Wall Street adage about bulls make money, bears make money, and pigs get slaughtered. I thought $14 was a good price for Ruckus Wireless, and I still do. You can't get all your holdings at 52 week lows.

The problem with the quarter and tepid guidance is a delay of orders from telecom carriers in China and North America. Lazard Capital's downgrade from a Buy to a Neutral rating didn't help either. According to the analyst at Lazard, it may take a few quarters for Ruckus to get back on their growth trajectory. I'm willing to wait. Q3 tends to be strong for Ruckus, and although this is six months away, I prefer to load up on good companies while they are experiencing some growing pains. I'd like to buy all stocks when they are at rock bottom, but it just doesn't work out that way most of the time.

Nuance Communications

Where Ruckus cratered 25% the day after their conference call, Nuance communications did almost the same, dropping 20%, from $23 to $19 right after their lackluster earnings presentation. Not only did they miss on the top and bottom lines, but they also had poor guidance for 2013. They are in transitional mode, from desktop to mobile, and also by the overall industry shift to on-demand, or cloud based services. I purchased shares at $19, and the equity hasn't budged even though Wedbush Securities rated the stock an Outperform yesterday.

Nuance has long been a favorite of mine for their futuristic voice recognition technologies. Just last week the company announced that they are providing a voice biometrics solution to securely and automatically confirm the identity of Barclays Wealth & Investment Management customers - using the sound of their voice. These are the type of companies I like to purchase, but it doesn't necessarily translate into a good investment unless the company can execute. In comes Carl Icahn.

In early April, Carl Icahn took a "passive" 9.3% stake in Nuance. After the conference call, it was made public that Mr. Icahn increased his stake to 10.7%. Carl Icahn has a reputation for making money, whether it be from good old fashioned "passive" investing, or putting pressure on the boards of companies he invests in. I am not sure what his intentions are with Nuance, but he may take an active role in the company's direction. This could be by taking it private, selling off some of Nuance's under performing divisions like imaging, or selling the company to a larger organization.

The fact that Mr. Icahn has taken a position in Nuance was not inconsequential when I decided to buy shares. I believe he may goose the share price in the short term if any headlines hit cyberspace spelling out his intentions. The stock trades near multi year lows. I thought is was a good bet despite my belief we are due for an overall market correction.


While the market has been roaring, both Nuance Communications and Ruckus Wireless have been snoring. My investing goals in technology companies is to try and double my money in three years. With my purchase price of $14.40 for Ruckus, and a 25% plus earnings growth rate once it regains traction, I think my chances are good it to hit $29 by 2016. However, just like my investment with Acme Packet (recently bought by Oracle), which was also dependent upon Telecom Carriers, you may have to languish for a quarter or two until spending picks up.

For Nuance, I think there may be pressure on the executive team to do something sooner than later. Besides Mr. Icahn's 10.7%, 14.6% of the company is owned by private equity firm Warburg Pincus LLC (as of March 14th). Although Warburg Pincus has been reducing their stake, those are two powerful entities that have a lot to say about the future of the company. Even if no actions are taken by Mr. Icahn, I still think I can double my money in 3 years. That would be a price of $38/share. Not an unreasonable goal if the market continues its climb.

Disclosure: I am long RKUS, NUAN.