Is Nuance Communications Still a Great Investment?


Siri's got a stalker. Google recently released an iPhone app to directly challenge Apple's voice recognition search assistant, trying to take advantage of the many limitations of the technology. Yet many reviews find it something of a mixed bag, performing better in some areas, lagging in others.

Nuance Communications , as the "voice" behind Siri, heralded a technological breakthrough by creating voice recognition as a true user interface. Not that it was without problems -- Siri 1.0 had a few bugs, to say the least -- but the latest iteration takes great strides forward. It also opens a gateway for Apple to enhance its revenue streams by allowing users to tap into the vast databases of search engines, including Google's. It becomes the repository of all that data, choking off the ability of its rival to mine the user's data.

For that reason the relationship between Nuance and Apple will only strengthen with time, but even the voice recognition expert isn't above snapping its fingers under Google's nose. As the search king has launched its rival technology for use on the iPhone, Nuance has shot back with voice recognition technology for use on Android-powered phones. Its Dragon Mobile Assistant builds on the popularity of its consumer-oriented Dragon NaturallySpeaking software, allowing users to make calls and text messages, set Facebook statuses, and get navigation help using naturally spoken commands.

Can you hear me now
Nuance also powers Ford's Sync, the integrated communications and entertainment system that's run on Microsoft's Windows vehicle OS. As an F-150 owner that's Sync-enabled, I can attest to the struggles sometimes encountered with supplying commands the system understands, but it shows the level of sophistication that will allow the voice recognition specialist to extend its dominance in this area.

Yet with Google, AT&T , and Microsoft offering competing technologies, voice recognition is quickly becoming a crowded cacophony of alternatives. But Nuance, as the industry leader, is the partner of first choice when speech recognition functionality is called for, and it's enjoyed design wins and partnerships this year with Cerner , Intel , and even Samsung.

Nor is Nuance resting on its laurels -- though that also brings up one of my least favorite aspects of the company. It makes no secret or apology for its growth-by-acquisition strategy. It's made six acquisitions this year, six last year, and five the year before that. It's made dozens over the past decade. While many have been small companies, which are not so difficult to integrate, the more they're performed and the larger they get causes many serial acquirers to suffer a case of indigestion.

Expanding possibilities
Although fourth quarter results did little to impress the market, revenue was up 28% to $469 million and adjusted earnings came in at $0.51 a share, falling short of analyst expectations on the top line but handily surpassing them on the bottom.

The market's valuing the company at less than 11 times earnings expectations, making it seem like a bargain stock, but with its enterprise value trading at more than 19 times its free cash flow, it's a little too rich for me at these levels. I think Nuance has the potential to be a great investment, but it would have to minimize the acquisition risks it holds before I could be comfortable owning the stock.

On Motley Fool CAPS, the 180,000-member investment community where informed opinion is translated into stock ratings of one to five stars, the voice recognition specialist carries a four-star rating. That puts it in sight of the truly great stocks that investors have ranked at the top five-star tier. Let me know in the comments box below if you think Nuance Communications can still call the shots in the voice recognition market.

A great opportunity for you
Speech recognition is yet another nascent technology set to explode with the rise of tablets and smartphones, and no company is better poised to benefit from this coming boom than Nuance Communications. However, this growth story doesn't come without risks, too. The Motley Fool recently published a premium research report to break down what investors interested in Nuance absolutely have to understand before investing, so click here now to grab your copy today.

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Fool contributor Rich Duprey owns shares of Apple and Intel. The Motley Fool owns shares of Apple, Ford, Google, Intel, and Microsoft. Motley Fool newsletter services recommend Apple, Ford, Google, Intel, Microsoft, and Nuance Communications. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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