At a time when the market for initial public offerings has been rocked with bad news, Wall Street and Main Street have every right to be leery of new companies coming to market. Some companies have pursued spin-off strategies to unlock value for their shareholders as an alternative to formal initial public offerings. This is where Nuance Communications Inc. (NASDAQ: NUAN) comes into play, after six years of being essentially range-bound.
Nuance is spinning off its Cerence on October 1. While many techies and computer users are quite aware of Nuance’s Dragon suites of audio-to-text, Cerence is the de facto leader in automotive speech recognition. According to published reports, Cerence has a market share of 80% or more, a vehicle install base of roughly 300 million vehicles and an intellectual property portfolio of more than 1,000 patents.
It is not that common to get research reports ahead of a company’s launch, but it has been seen before. Nuance was last seen trading near $16.20, and its ex-shares were closer to $14.10 ahead of the formal trading. Cerence shares will trade on Nasdaq under the CRNC stock ticker, but it has so-called when issued shares trading under the CRNCV ticker with a share price of $17.50.
Wedbush Securities analyst Daniel Ives has issued an Outperform rating on Cerence with a $23 price target. That calls for upside just over 34%, if the predictions pan out. Ives noted that Cerence’s technology is embedded in roughly 50% of the new cars shipped, and that is substantial.
Ives, who covers software rivals for Nuance, has noted that voice assistant technology from Google, Apple and Amazon have put a major brick wall in front of Nuance’s ability to further penetrate OEMs/suppliers. His research note said showed that Nuance’s auto efforts were constrained as a modest-sized division within a much larger organization, but on its own will be able to step up its growth and opportunities as a pure-play auto next-generation speech player, and as a stock with an attractive risk/reward, healthy EBITDA and cash flow.
Ives listed three major changes that will be seen once Cerence is out from under Nuance:
- CEO Sanjay Dhawan is a clear positive with his extensive embedded and cloud auto experience;
- a clear path to further penetrate OEMs as a pure play AutoTech company with an expanded product suite;
- and shifting to more cloud-driven applications and speech based technology is still in the early days in an industry set to grow 15% to 20%.
Also worth noting here is a report summary from the same firm on Nuance a week earlier with its own upside call for the stock.
Remember that most analyst calls in established companies tend to come with upside projections of 8% to 10% at this stage of the 10-year-plus bull market. While investors ought to know that sell-side analyst calls should never be the only source of research into making a decision, Wedbush Securities is calling for about 31% upside here, once Cerence gets out on its own.