Nuance Communications (NASDAQ:NUAN) might not be a name you'd recognize right off, but chances are its product line is a lot more familiar. If you've ever used Dragon Naturally Speaking voice transcription software, then you're already familiar with Nuance Communications. Nuance Communications recently gained nearly 16% on the strength of one big move that will ensure the company is never the same again. Some profit-taking has kicked in since, of course, but the new plateau Nuance finds itself perched upon is still very much in tact.
Just One Big Move Was All It Took
The big move in question was Microsoft (NASDAQ:MSFT), announcing an agreement to purchase Nuance for $56 per share, about 23% of what it closed at back on Friday. The move was strictly a cash deal, and Microsoft will ultimately pay out a combined total of $19.7 billion for the company, which includes debt.
Nuance is well-known for its Dragon Naturally Speaking software, which allows users to speak what they want put into a Word or similar document and have it transcribed accordingly. The system has improved substantially over the years, and though it misses words occasionally, it's still generating some solid results. Sufficiently solid, in fact, that it's been able to branch out into other fields, like healthcare.
Reports note that Microsoft will be putting Nuance's technology to work as part of the larger operations that specifically target other business users and governments. Further reports suggest that Microsoft will put particular weight on Nuance products as part of its cloud-based healthcare tools initiative, which was launched back in 2020.
Nuance's revenue hasn't exactly been the best in recent years; the fourth quarter of 2020, for example, featured the company bringing in $7 million in net income against revenue of $346 million. Revenue was also down 4% against the fourth quarter of 2019's figures.
This move also comes at an interesting time for Microsoft; the company has been on an acquisitional tear in recent months, picking up companies like LinkedIn and potentially Discord. However, the company has also shut down some of its own voice recognition systems, like Cortana.
Slightly Slipping Sentiment
Before the Microsoft deal looked to kick in, Nuance's position in the analyst pool—as based on our latest research—was surprisingly solid. While there was some bearish sentiment starting to slip in, for the most part, analysts were bullish on the company's future.
A year ago, the company had five “buy” ratings to its credit. Six months ago, though, things started to slip a bit toward bearish as the company picked up a “sell” rating for the first time that year, but also added two more “buy” recommendations. Three months ago, the ratio of seven “buy” and one “sell” remained. That brings us to the present day, where two of the “buy” ratings have been changed to “hold”, giving us a consensus recommendation of five “buy”, two “hold” and one “sell.” Both Craig Hallum and Wedbush are now reporting “hold” ratings instead of previously-held “buy” ratings.
The Good News and the Potentially Greater News
The good news is that, for anyone who buys in on Nuance right now, there's likely to be a premium kicking in. Nuance currently trades at $52.28 per share, and Microsoft plans to buy in at $56 per share. Thus, anyone buying in right now will soon have their shares bought up for about $4 more per share than they paid, which could be a great deal.
However, Nuance is definitely not a long-term buy. It can't be. It won't be available as a publicly-traded company much longer because it will be folded wholly into Microsoft. Which brings up the inevitable conclusion: should one make the investment in Microsoft instead? There are certainly a number of compelling reasons to do so; Microsoft has a presence on a variety of fronts, many of which are even complementary. Improvement in one market improves its presence in other markets; its notion of acquiring Discord, for example, would look to improve its gaming market presence, which is currently felt in both PC and console breeds thanks to its still-difficult-to-find-even-six-months-later Xbox Series X. The Nuance move, meanwhile, will bring in value for the business, government, and healthcare sectors, who are likely all eager to stop punching keys every time a report needs to be filed.
Thus, this leaves the investor with a likely roadmap for both short-term and long-term plans here. Nuance has a floor of $56, thanks to the Microsoft deal, so as long as that goes through and Nuance is under $56, there's little reason not to buy in. However, the shift from Nuance to Microsoft will present investors with a whole new battle plan to consider, as it will be Microsoft who realizes any future benefit from Nuance's technology.
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