Three years ago, Apple Inc. (AAPL) unveiled its revolutionary digital assistant, Siri. Since then, the speech recognition industry has advanced by leaps and bounds, and what was once science fiction is set to become a $133 billion market by 2017.
Speech recognition software isn’t perfect yet, but it has evolved tremendously in recent years and has been forecast to increase at a CAGR of more than 22% through 2016.
And some big players are taking notice of the growth in voice recognition. Since early 2013, activist investor Carl Icahn has been quietly amassing shares of perhaps the most renowned voice recognition stock on the market, Nuance Communications Inc. (NUAN). Nuance isn’t the only game in town, but it is one of the most well-known.
However, for all its success in the space, Nuance is not the best way to play voice recognition.
Why Is Speech Recognition Technology Such a Big Deal?
For most of us, speech recognition software lies somewhere between a novelty and an occasional convenience. But speech recognition software has made its way from the basement to the big time and has been revolutionizing a host of industries, some of which might just surprise you.
Possibilities for enterprise applications of modern speech recognition are endless, and the technology offers businesses the chance to get a lot more done, a lot faster. Corporations can utilize voice recognition technology to transcribe dictation and other audio recordings. Physicians now enter more accurate and specific notes in patient files.
Taking it a step further, nearly $3 billion of the future market will be from voice biometrics — the use of your voice as a security tool. Barclays already uses a sophisticated “foolproof” system that identifies bank customers by their unique speech patterns, as opposed to a series of memorized passwords and secret questions.
Banking customers are granted access to their accounts within seconds, as opposed to the usual cumbersome process of validating addresses, phone numbers, and mother’s maiden names. Iain Hanlon, a Barclays executive, told The Daily Mail, “The general feeling is that voice biometrics will be the de facto standard in the next two or three years.”
Is NUAN Good for My Portfolio?
NUAN isn’t the only game in town, but it is responsible for Apple’s iconic Siri, plus acclaimed computer dictation software Dragon. NUAN shares spiked almost 35% during the two weeks after Siri was added to the iPhone in Oct. 2011, peaking just under $30 in Feb. 2012. Unfortunately for Nuance stock investors, shares haven’t seen prices like that since then, and are now languishing around $14 apiece.
In its fiscal 2014 fourth-quarter earnings report, NUAN recorded adjusted earnings of 33 cents per share, up from 30 cents in the year-ago period, and operating margin of 25.9%, up from 25.3% year over year. Quarterly cash flow was also up 2.6% to $95.9 million from $93.5 million in fiscal 2013’s fourth quarter.
NUAN hasn’t treated investors well over the past few years, as much of the turmoil surrounding Nuance stock prices has been due to advancements in speech recognition technology by competitors. Google Inc (GOOG), for example, responded to Apple’s Siri with a digital assistant of its own, dubbed Google Now. Integrated with other GOOG services like Gmail and Maps, Google Now offered Android smartphone users voice recognition features on par with Siri.
So does NUAN stock still stack up to the competition?
Is There Money to Be Made With Voice Recognition Technology?
It’s clear There’s plenty interest in the future of voice recognition, and lots of money will be made as the ever-advancing technology arena finds new and creative uses for software that can understand, interpret, and react to the spoken word.
However, a long-term position in NUAN isn’t a wise choice. It’s not feasible for a company like Nuance (with its $4.5 billion market cap) to realistically compete against powerhouses the likes of Apple, Google and Microsoft (MSFT) — all of whom have market caps in the hundreds of billions of dollars.
NUAN stock seems like a reasonably attractive takeover target, which could translate into a potentially profitable short-term buy, but that’s about all it’s good for right now. The companies with the money, power, and distribution resources to bring about the voice recognition revolution already have what they need to fine tune their products.
So, if Nuance is eventually purchased by Samsung, or some other tech giant, NUAN shareholders will enjoy a nice bump while the takeover is making headlines. But until and unless that happens, don’t expect a whole lot from NUAN stock.
What Stocks Are Voice Recognition Buys?
If you want your portfolio to contain stocks of companies that develop and distribute cutting edge voice recognition technology, simply buy shares of the biggest names in the tech sector — Apple, Google, Microsoft, and Samsung.
You can also add Amazon.com, Inc. (AMZN) to the list, considering the online retail giant’s recent release of its Echo device, which responds to a user’s voice commands to play music, conduct searches, and manage home automation technology, among other things.
In addition to its Cortana voice assistant on Windows Phones, Microsoft has been slowly rolling out a beta version of a Translator service for Skype, which should allow users to communicate in real time — even if they can’t speak each other’s language. The software will translate more than 40 languages into the user’s preferred language.
Real-time translation success could go a long way toward helping Microsoft make up the gap created by Cortana’s late introduction to the smartphone arena.
China’s internet behemoth Baidu (BIDU) announced last month that it has devised a method of improving current speech recognition methodology, which it calls Deep Speech. According to Andrew Ng, Baidu’s chief scientist, the new method trumps accuracy and recognition errors when compared to Siri and Google Now.
There’s no doubt that speech recognition will be the norm in the next few years, and eventually our voices will become our digital keys. But, none of the pure-play voice recognition stocks has been able to survive. NUAN is the only one still around, but Nuance stock has been stuck on a downward slope for years.
Since advanced voice recognition and text-to-speech capabilities are becoming available, and expected, on every new smartphone and tablet, owning the big dogs of the mobile sector includes speech recognition. Stocks like AAPL, GOOG, MSFT, and even AMZN are the best ways to bet on voice recognition.
As of this writing, Greg Gambone did not hold a position in any of the aforementioned securities.