With the increasing use of artificial intelligence (AI) worldwide in various sectors, the speech recognition AI provider Nuance Communications, Inc. (NUAN) has  gained 131.8% over the past year to close yesterday’s trading session at $44.41. The company’s Dragon Medical One cloud-based speech solution has greatly benefited the healthcare segment. In fact, it earned top honors as the 2021 Best in KLAS: Software & Services award winner.

However, despite these positive developments, the stock has declined 11.8% since hitting its all-time high of $51.62 on February 8, 2021. This can be attributed primarily to the company’s weak financials for its last-reported quarter (ended December 31, 2020).

Furthermore, NUAN is expected to close the sale of its medical transcription and electronic healthcare record go-live businesses in the second quarter of fiscal 2021. So, the stock could witness a further dip in the near term.

Here are the factors that we think could influence NUAN’s performance in the coming months:

Acquisition of Saykara

NUAN announced its  acquisition of Saykara on February 8. Saykara is a startup company that is focused on  developing a mobile AI assistant to automate clinical documentation for physicians. Joe Petro, NUAN’s  Executive VP and CTO, said, “The complementary technology built by the Saykara team aligns strongly with our technology portfolio and growth strategy as well as the needs of our clients.”

Increasing Adoption of NUAN’s Products and Services

NUAN collaborated with Walgreens Boots Alliance, Inc. (WBA) on March 10 to help its customers schedule  COVID-19 vaccine appointments24 hours a day, seven days a week. This was made possible by NUAN’s AI-powered Intelligent Engagement solutions. Several physicians at  academic medical centers, such as Augusta University Health and Metro Health, also increased the use of the company’s Nuance Dragon Ambient eXperience (DAX) ambient clinical intelligence (ACI) solution.

Weak Financials

The company’s total revenues declined 4.4% year-over-year to $345.75 million for the fiscal 2021 first quarter, ended December 31, 2020. Revenue from its  product and licensing segment also declined 31.2% year-over-year to $86.04 million for the quarter. Its net income for the first quarter came in at $14.90 million, down 69.4% year-over-year and its non-GAAP EPS declined more than 9% year-over-year to $0.20.

Expensive Valuation

In terms of forward non-GAAP price/earnings, NUAN’s 59.81x is significantly higher than the industry average  26.47x. In terms of forward price/sales, the stock’s 9.20x is also higher than the industry average  4.08x. The stock’s forward enterprise value/sales of 9.74x is also higher than the industry average of 4.30x.

POWR Ratings Don’t Indicate Enough Upside

NUAN has an overall rating of C, which equates to Neutral in our POWR Ratings system. The POWR Ratings are calculated by considering 118 different factors with the weighting of each optimized to improve overall performance.

Our proprietary rating system also evaluates each stock based on eight different categories. Among those categories, NUAN has a C grade for Momentum. This is justified given that it gained 44.2% over the past six months but lost nearly 10% over the past month.

The stock has a C grade for Quality also. This is consistent with its trailing-12-month gross profit margin of 59.3% which is slightly higher than the industry average 48.4%. The company’s trailing-12-month return on common equity and trailing-12-month return on total assets are negative.

In addition to the grades I’ve just highlighted, you can see NUAN’s ratings for Growth, Stability, Value and Sentiment here.

NUAN is ranked #49 of 112 stocks in the D-rated Software – Application industry.

Better than NUAN: Click here to access several other top-rated stocks in the same industry.

Bottom Line

Over the long term,  NUAN is expected to witness greater  demand for its products and services with the increasing application of AI in several sectors, including  healthcare, financial and telecommunications, among others. However, given the company’s weak financials, its high valuation is not justified. So, we think it wise to wait for  announcements or developments that can justify its valuations before buying  the stock.

Want More Great Investing Ideas?

11 Top Stocks for March 2021

9 “MUST OWN” Growth Stocks for 2021

How to Ride the 2021 Stock Market Bubble

5 WINNING Stocks Chart Patterns

NUAN shares were trading at $44.33 per share on Friday afternoon, down $0.08 (-0.18%). Year-to-date, NUAN has gained 0.54%, versus a 4.98% rise in the benchmark S&P 500 index during the same period.

About the Author: Manisha Chatterjee

Since she was young, Manisha has had a strong interest in the stock market. She majored in Economics in college and has a passion for writing, which has led to her career as a research analyst. More...

More Resources for the Stocks in this Article