Nuance: "Dumpster Diving" in Tech

12/10/2013 8:00 am EST

Focus: STOCKS

While we often like to go "dumpster diving" to find stocks, analysts tend to shy away from recommending a falling stock, suggests Geoffrey Seiler, editor of BullMarket.com.

Our newest Recommended List selection, Nuance (NUAN), $13.51, is one such falling stock.

However, Nuance did find a fan in Standpoint analyst Ronnie Moas, who stepped in during the carnage and initiated coverage of the stock with a buy rating and $18 price target.

Moas wrote. "Nuance shares have now dropped by nearly 50% since February and are attractive. The voice recognition market should grow at near double-digit rates annually for, at least, a few more years and will top $60 billion by 2016.”

The analyst also notes that NUAN is being targeted by activists and that should “support the stock in the near-term and hopefully boost the stock in the medium-term."

In my view, Nuance obviously has been dealing with some issues this year, otherwise it wouldn't be trading around a four-year low.

However, it is still the leader in voice recognition and transcription technology, and its newer products, such as its Clintegrity clinical documentation and coding solutions product for the healthcare industry, have gained good traction.

Meanwhile, the company is moving towards a more recurring revenue business model (think cloud-based solutions, term-based, subscription, and transactional pricing models), and away from perpetual license deals.

What this does is reduce upfront revenue, replacing it with a more predictable, recurring revenue stream.

While this transition can lead to lumpy results, the market has embraced other firms that have made this transition, such as Adobe (ADBE) and Autodesk (ADSK).

If investors take a similar approach with Nuance, they will be watching bookings much more than revenue and earnings through this transitional period.

With Carl Icahn rattling Nuance's cage and the stock washed out, we think investors have a couple of ways to win with this downtrodden market leader in voice recognition and transcription technology. We rate the stock a Buy with a $22 price target.

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