This Just In: More Upgrades and Downgrades

At The Motley Fool, we poke plenty of fun at Wall Street analysts and their endless cycle of upgrades, downgrades, and "initiating coverage at neutral." Today, we'll show you whether those bigwigs actually know what they're talking about. To help, we've enlisted Motley Fool CAPS to track the long-term performance of Wall Street's best and worst.

Wall Street asks Nuance: Can you hear me now?
About a month ago, I told you about a double dose of good news Wall Street gave Nuance Communications (NAS: NUAN) . The ace investors at Longbow Research recommended buying the stock, and not to be outdone, the folks at FBR Capital hiked their price target to $33 per share. So far, however, neither one of these analytical thumbs-up has come to much of anything, and Nuance basically treaded water all month long.

Shareholders had better hope history's not going to repeat itself, though, because this week the exact same thing happened. On Monday, investment banker ThinkEquity upgraded Nuance to "buy." One day later, Oppenheimer -- already a fan -- upped its price target on Nuance stock by 13%, to $34.

Most of the reasons should be familiar by now. TE argues there's a continuing "market opportunity in speech technology, particularly in mobile and consumer product markets." Apple's (NAS: AAPL) introduction of the Siri virtual assistant on iPhone 4S (using Nuance technology) was the catalyst. And now we know Nuance is working with Intel (NAS: INTC) to create voice-enabled ultrabook laptops. (We also know, thanks to this week's upgrade at Maxim Group, that Intel is depending heavily on the ultrabook project succeeding, which should be good news for Nuance.)

Meanwhile, Apple's Android-based rivals are working to develop their own versions of Siri -- and if Google's (NAS: GOOG) Majel project doesn't pan out, Nuance would probably be happy to help Samsung, HTC, Motorola -- any number of potential Android partners -- to develop voice recognition based on its own technology. But even that's just the start of the analysts' argument in favor of Nuance. According to ThinkEquity, for example, Nuance is deploying speech recognition technology in "new markets beyond traditional segments like call center, health care and legal."

Speak of the Dragon
As if by magic, Nuance produced evidence in support of ThinkEquity's argument yesterday, announcing a partnership with Kraft (NYS: KFT) . According to Nuance's latest press release, Nuance's Dragon Mobile SDK program will power "Kraft Foods' iFood Assistant 4.0 app for iPhone and iPod touch." A veritable Siri in a chef's cap, this new app promises users the ability to "easily create their shopping list, search for recipes and navigate recipe steps with their voice."

"Siri, give me a recipe for a $34 stock price"
So...a tuna noodle casserole app. I suppose we can give Nuance points for creativity on this one, but as far as ideas like these helping to justify Nuance's stock price goes, I have my doubts. We're still looking here at a stock that costs 240 times earnings. A company that's only expected to grow earnings at about 15% per year over the next five years. A company that -- even if it succeeds in growing GAAP "earnings" -- is still burning cash like it's going out of style, and depending heavily on acquisitions of other companies to keep its growth rate going.

ThinkEquity may believe that Nuance can achieve more organic growth this year, increasing revenues "in the mid-teens on a percentage basis." But even this analyst admits there's likely to be a "softening next year." In which case, keeping the revenues growing may require even more acquisitions.

Foolish takeaway
Nuance fans may argue that this doesn't matter. That so long as Nuance is growing, it's not important how it's growing -- because growth is growth. Me, I'm not so sure.

Consider: Over the past five years, Nuance has spent $111 million on capital expenditures, and a further $124 million on acquiring technology. It's generated $1.2 billion in cash flow from these investments, plus its core operations, which sounds pretty good. Problem is, Nuance has also spent nearly $1.7 billion on buying competitors wholesale, to entire companies to fuel its growth. Result: Nuance's cash levels are falling, and its debt is rising, while tangible book value at the company remains firmly mired in negative numbers.

I won't argue Nuance isn't growing. It is. I'm just not convinced any of this growth is worth paying for.

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At the time thisarticle was published Fool contributor Rich Smith does not own shares of (or short) any company named above. You can find him on CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked No. 328 out of more than 180,000 members. The Motley Fool has a disclosure policy.The Motley Fool owns shares of Google, Apple, and Intel. Motley Fool newsletter services have recommended buying shares of Google, Apple, Intel, and Nuance Communications. Motley Fool newsletter services have recommended creating a bull call spread position in Apple.We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

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