After Rising 95%, Will Nuance Communications’ Stock Slow Down?

by Trefis Team
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Nuance Communications’ stock (NASDAQ: NUAN) has rallied 95% since late March (vs. about 51% for the S&P 500) to its current level of $29. This is after the stock dropped to levels of $15 in late March, as a rapid increase in the number of Covid-19 cases outside China spooked investors, and resulted in heightened fears of an imminent global economic downturn. The stock is currently above its February 2020 price of $23. Are the gains warranted or are investors getting ahead of themselves? We believe that the stock recovery is justified, but the stock has only moderate growth potential in the near term. Why is that? Nuance communication, a speech recognition, and artificial intelligence company, introduced Nuance Conversational AI in April which eliminates putting customers on hold, helping solve the problem of overburdened service centers. The stock was further boosted as Albertsons Companies, Inc teamed up with the company to deploy Nuance’s Intelligent Engagement Platform to Albertsons’ online grocery platform. We also have a detailed comparison of Nuance Communications’ stock performance during the current crisis with that during the 2008 recession in our dashboard analysis.

 

How Did Nuance Communications Fare During 2008 Downturn?

We see NUAN’s stock declined from levels of around $19 in October 2007 (the pre-crisis peak) to roughly $9 in March 2009 (as the markets bottomed out) – implying that the stock lost as much as 54% of its value from its approximate pre-crisis peak. This marked a drop that was lower than the broader S&P, which fell by about 51%.

Further, NUAN’s stock rose steadily post the 2008 crisis to about $16 in early 2010 – rising by about 75% between March 2009 and January 2010, as against the S&P which bounced back by about 48% over the same period.

In comparison, NUAN’s stock lost 36% of its value between 19th February and 23rd March 2020, and has already recovered 95% since then. The S&P in comparison fell by about 34% and rebounded by about 51%.

Is The Recovery Warranted & Can We Expect Further Gains?

The rally across industries over recent months can primarily be attributed to the Fed stimulus which largely quieted investor concerns about the near-term survival of companies. The flattening of Covid cases in the worst hit U.S. and European cities is also giving investors confidence that developed markets have put the worst of the pandemic behind them.

Nuance Communications’ revenues saw a high growth in Q2 2020 (ended March 2020) and for Q3 2020 (ended June 2020) Revenue and EPS exceeded the high end of guidance of the year. The company benefited from the closing of call centers due to the pandemic and saw a high demand for their messaging and AI services. In Q3 its Cloud initiatives saw a huge demand with Dragon Medical Cloud growing 34% y-o-y. Newer cloud-based healthcare offerings, such as PowerScribe One and CDE One, also saw a good demand.

Over the coming weeks, we expect continued improvement in demand and subdued growth in the number of new Covid-19 cases in the U.S. to boost market expectations. Following the Fed stimulus — which helped set a floor on fear — the market has been willing to “look through” the current weak period and take a longer-term view, with investors focusing their attention on 2021 results.

What if you’re looking for a more balanced portfolio instead? Here’s a top quality portfolio to outperform the market, with over 100% return since 2016, versus 55% for the S&P 500. Comprised of companies with strong revenue growth, healthy profits, lots of cash, and low risk. It has outperformed the broader market year after year, consistently.

 

 

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