|At first glance, Nuance Communications (NUAN) has a few factors working against it. The company is in the midst of a long-term transition to a new business model, has posted a string of earnings disappointments, and saw shares flounder last year as the overall market soared.|
But dig deeper and you’ll see that this speech recognition software company stands out as a game changer thanks to its impressive technology, large-cap ally, and a big-name activist shareholder with a large stake in its future. And with evidence the company’s results are turning a corner, the stock is an attractive buy at current prices ahead of strong potential growth.
Even if you’re not familiar with Nuance, you’re likely on friendly terms with one of its most famous software personas. NUAN powers Siri, the ubiquitous personal assistant that so many iPhone users look to for directions, where to eat or just some disembodied conversation. NUAN earns revenue from Apple (AAPL) via flat fees, which are not determined by how many phones it sells.
But while NUAN is a bit of an indirect play on AAPL, no customer accounts for 10% or more of sales, which adds further downside protection.
The company also makes Dragon NaturallySpeaking software, which converts speech into text for PCs, and recently announced that it will work with Intel (INTC) to introduce new voice recognition into Atom and core chips powering notebooks. Another key product is Nuance’s Swype technology, which has been making inroads into Android-powered devices.
NUAN has multiple new revenue streams in place that are just starting to materialize, from voice biometrics (which could be a boon to financial institutions and others looking to protect sensitive data) to new avenues like voice ads.
Let’s not forget about that big-name shareholder I mentioned. Nuance has come under fire in the past for its corporate payment structure, when the CEO’s salary famously accounted for 50% of operating income. But now, activist investor Carl Icahn owns about 24% of NUAN stock — up from the low-single digits a year ago. He also has managed to get two of the 12 board seats.
Some investors have speculated that Icahn will push for a breakup of the company or at least a substantial change in management. And given his recent famed forays into Apple, where he owns about $3 billion in shares, other industry watchers think he’ll push for Apple to buy NUAN. For now, Icahn has said he would not do that, but his presence certainly brings a level of attention to NUAN stock. Whatever course of action Icahn takes (and given his level of persuasion, other large shareholders may be inclined to join him), it’s likely that major changes are in the offing for this company, and that could send the stock soaring.