Should You Follow Icahn Into Nuance?

by Tom Taulli | April 2, 2013 2:46 pm

Activist billionaire Carl Icahn has been very busy lately with tech deals, buying large positions in companies like Dell (NASDAQ:DELL[1]) and Netflix (NASDAQ:NFLX[2]). And he’s not done yet.

Icahn has nabbed a 9.27% stake[3] in Nuance (NASDAQ:NUAN[4]), a provider of voice recognition technology, sending shares up about 7% by Tuesday afternoon.

Icahn always likes a bargain, and Nuance — quite the laggard — certainly is one. Back in February, NUAN sunk to 52-week lows after reporting a weak fiscal Q1.

Of course, Icahn is not the only investor who sees value. Private equity operator Warburg Pincus recently announced a 14.6% stake in Nuance.

So, should you follow the smart money into NUAN? Well …

Powerful Megatrends

Over the years, Nuance has built its business through aggressive acquisitions. The result is three core business segments, including mobile & consumer, enterprise and healthcare. More importantly, Nuance is at the sweet spot of several mega trends, such as the cloud, voice, mobile, artificial intelligence and Big Data.

It’s inevitable that smart devices will take on more human traits, with the ability to recognize language and to understand habits and interests. Already, Nuance is behind this trend; the company powers Apple’s (NASDAQ:AAPL[5]) Siri as well as other mobile devices including Samsung’s (PINK:SSNLF[6]) Galaxy.

To create these technologies, Nuance has thrown the kitchen sink at its R&D division, which has about 1,600 employees (of the company’s total 6,000). Roughly 400 are devoted strictly to research, performing fundamental work on advanced algorithms and modeling.

This spending has led to strong growth, with revenues climbing 28.2% to $462.3 million in the most recent quarter, and non-GAAP earnings improving 4% to $113 million.

Despite all this, Nuance’s stock performance has actually been a disappointment of late. After a seven-year period that saw NUAN rise from low single digits to nearly $30 per share, the stock peaked in early 2012 and is off more than 25% since then, including a -4% performance year-to-date vs. 8% gains for the Nasdaq.

The Outlook

Perhaps a key reason for the lackluster performance is that Nuance is spread too thin. After all, it is extremely tough for a company to attack three distinct huge markets. My guess: Icahn probably sees an opportunity to split up the operations.

For example, the enterprise and medical divisions would be particularly attractive to players like IBM (NYSE:IBM[7]) or Oracle (NASDAQ:ORCL[8]). These mega-operators have enormous customer bases that could monetize such technologies. Or, the core mobile business could be a great fit for Apple, which could stand to blunt the success that Google (NASDAQ:GOOG[9]) has had with the voice market.

So for now, Icahn has given Nuance’s stock something of a floor; if the stock weakens, Icahn likely will be quick to rattle some cages. In fact, he’ll probably do so even if the stock price so much as stagnates.

More likely, though, Icahn’s current involvement will be enough to spur management to find ways to boost shareholder value — and fast. Which means those currently in NUAN should see more upside going forward.

Tom Taulli runs the InvestorPlace blog IPO Playbook[10]. He is also the author of “How to Create the Next Facebook[11]” and “High-Profit IPO Strategies: Finding Breakout IPOs for Investors and Traders[12].”Follow him on Twitter at @ttaulli[13]. As of this writing, he did not hold a position in any of the aforementioned securities.

  1. DELL:
  2. NFLX:
  3. has nabbed a 9.27% stake:
  4. NUAN:
  5. AAPL:
  6. SSNLF:
  7. IBM:
  8. ORCL:
  9. GOOG:
  10. IPO Playbook:
  11. How to Create the Next Facebook:
  12. High-Profit IPO Strategies: Finding Breakout IPOs for Investors and Traders:
  13. @ttaulli:

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