Is Nuance Communications' Stock Growing Too Fast?

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It's always exciting to watch one (or more) of your stocks take off for the moon. This year has brought plenty of rocket launches, some which are reversing long losses, and others that are just continuing upward. But nothing continues forever. Like a rocket without fuel, a company without fundamental earnings growth can send its stock price tumbling. I'd like to look at Nuance Communications (NAS: NUAN) today to find out how sustainable its momentum really is.

Graphing the growth
By digging down beneath the news cycle that drives many stocks, we can find whether the hype is real, or if a rise is dragged higher by helium. A company should be improving its profitability along with its revenue for value-oriented investors to take it seriously.

Nuance has been in the headlines a lot lately, in large part because of its key role powering Apple's (NAS: AAPL) Siri, and that software's conspicuous absence from the latest iPad iteration. But Nuance's speech-recognition technology has plenty of customer diversity beyond a key Cupertino connection. Nokia (NYS: NOK) , Ford (NYS: F) , and Xerox (NYS: XRX) have all signed up to use Nuance's technology, and these companies represent only a slice of the total user pie. The company's growing user roster has kept a number of key metrics marching ahead of its stock-price growth:

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Nuance Communications Total Return Price Chart by YCharts

In this case, free cash flow is a better representation of Nuance's potential than highly erratic reported net income, which has been all over the place in the past five years. Fortunately for shareholders, it's been heading in one very appealing direction of late:

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Nuance Communications Net Income TTM Chart by YCharts

But what does it mean?
Long-term shareholders have seen growth on all fronts, but the stock has increased substantially over shorter time frames -- it's up 50% on the past year and 179% in the past three. Rumors have swirled that Apple might want to buy the company, and Apple news continues to be a big driver of stock movements. But Nuance has itself been acquisitive of late, improving its non-Siri revenue stream by gobbling up a medical-transcription rival hot on the heels of buying major voice-recognition rival Vlingo.

Its P/E might look quite high, but on a price-to-free-cash-flow basis, Nuance's ratio is a much more palatable 24.4. Other metrics also make the company look more appealing, as Foolish analyst Anand Chokkavelu demonstrated last year. Fellow Fool Anders Bylund thinks the company's recent descent from first-quarter mediocrity represents a buying opportunity. Most analysts agree; 16 rate the company at least a "buy," with only one issuing a sell call.

I'm always cautious when it comes to hot technology that major companies want a piece of. Google has been working on its speech-recognition capabilities for years, and that could be just the tip of the iceberg. My recent poll of interested investors, with more than 300 votes submitted, found that half of respondents don't think any company will sustain a long-term advantage in voice recognition. Your investing thesis for Nuance will have to rely heavily on whether or not you agree with that assessment, since recent gains seem to be riding on it. The stock might not rocket higher right away, but there's little to indicate an unsustainable peak.

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At the time this article was published Fool contributorAlex Planesholds no financial position in any company mentioned here. Add him onGoogle+or follow him on Twitter, where he goes by@TMFBiggles, for more news and insights. The Motley Fool owns shares of Apple, Ford, and Google.Motley Fool newsletter serviceshave recommended buying shares of Apple, Nokia, Nuance Communications, Google, and Ford, creating a synthetic long position in Ford, and creating a bull call spread position in Apple. Try any of our Foolish newsletter servicesfree for 30 days. We Fools don't all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.

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