Time to Talk about Nuance

02/14/2014 8:00 am EST

Focus: STOCKS

Tyler Laundon

Editor, Cabot Small-Cap Confidential

I want to take advantage of this soft spot in the market to pick up shares of a rare tech stock that is trading at a discount; the company is the market leader in voice-recognition software, suggests Tyler Laundon, editor of Top Stock Insights.

You're probably most aware of Nuance Communications (NUAN) because of its Dragon voice-recognition software, the iPhone's personal assistant known as "Siri," or from that "Swype" technology found on Android phones. Nuance has developed all of these products.

You've also been exposed to the company's software if you've called a company and been directed to an automated answering service. Nuance does a lot of work with call centers.

And if you've been in a newer BMW or Audi, you may have used Nuance's software to relay directions to the car's GPS unit. These are all areas where Nuance's voice-recognition technology is being used today.

The company is also a major player in the healthcare market too. One of its products helps care providers create and manage electronic records. Doctors can dictate details of a patient's visit, and that information will automatically convert into text in the required forms.

Yes, voice-recognition technology still has a way to go before people stop getting frustrated with its shortcomings. Siri isn't exactly perfect. And Dragon certainly requires some careful editing. But the software is still incredibly useful. And it's only going to improve.

The number of new products coming out with voice-recognition features is snowballing. Next on the product list are things like TV, household lighting controls, thermostats, and wearable technologies.

The company is transitioning from a license business to a subscription business model, which makes for messy quarter-over-quarter and year-over-year financial analysis.

The bottom line is that we'll look over most of that noise because the fundamentals of the business suggest NUAN's best days lie ahead. It has valuable voice-recognition technology that is in demand in several large markets (mobile, auto, healthcare).

And while mobile has historically been the largest growth driver, the more diversified markets NUAN expects to serve in the future, along with the subscription business model, should mean more consistent growth. Shares are cheap, but I don't expect they'll remain that way for too long.

Finally, there is a real push inside the NUAN shareholder base to get the company back on track. In mid-December, activist investor Carl Icahn disclosed that he owns a 19.2% stake in the company. That's a hefty vote of confidence in this company.

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