The company that makes the biggest profits in the next wave of technology breakthroughs will be the first one to market devices that really talk. We've all been astounded by Apple's (NASDAQ:AAPL) Siri personal assistant. But while Apple has raised the bar by popularizing the idea of talking devices, Siri is just the tip of the iceberg.
All manner of talking devices are on their way to consumers and the company that can figure out how to get their software to really talk to us will make a lot of money. Techies in the know about voice recognition software think that Google (NASDAQ:GOOG) has the lead with Android, but Apple might be close behind.
The Possibilities Are Endless
Voice-recognition software could be utilized in all sorts of devices. A current example is cars in which you can turn on your radio and chose your station by voice. The next generation of vehicles might start on the recognition of their owner's voice and even follow some commands.
- Warning! GuruFocus has detected 5 Warning Signs with AAPL. Click here to check it out.
- AAPL 15-Year Financial Data
- The intrinsic value of AAPL
- Peter Lynch Chart of AAPL
Voice-recognition software could also make cash registers and ATM machines smarter. It could speed up the purchasing process by asking a customer for a name and a password and possibly even remember the customer's voice.
Online it might be possible to make all manner of applications that respond to a voice. One might be a virtual receptionist that sets appointments for professionals or answers questions. It might be possible to bank or order products purely by voice. This could lead to the replacement of tablets and laptops by wearable devices.
One reason why such software is potentially profitable is that people want to surf the web and perform basic functions without a touch screen. Somebody might want to be able to pick songs from a playlist or get the day's weather forecast without looking at a screen.
Laws and popular sentiment against practices like texting while driving also promote the use of voice-recognition software. Every news story about new laws against cell phone use while driving is an advertisement for Bluetooth and other voice recognition devices. The potential and the demand are certainly out there, but which companies are poised to take advantage of it?
Long-term tech investors have probably heard this story before. There's a new application that could be in high demand, but how many companies have voice recognition that is actually commercially viable? Not as many as you think, some of the big technology companies including Microsoft (MSFT) seem to be behind the curve on voice recognition possibly because their business model is based on physical interfaces such as keyboards.
The Software Behind Apple's Siri
There is one company that is ahead of the curve in the world of voice-recognition technology, Nuance Communications (NASDAQ:NUAN) which manufactures Dragon, the software that makes Apple's Siri work. Dragon is also the basis of the Sync infotainment system now used in many Ford vehicles.
Nuance is the gold standard in voice-recognition software and its stock price is surprisingly low. At the end of business on May 10, Nuance was trading at just $19.01 a share, an incredible bargain considering that it trades at a low forward-looking price-to-earnings ratio of 12, and compared to Google's 16. Although, the latter has a stronger balance sheet, let's face it that Google is out of almost everybody's price range.
Nuance's long-term earnings trend is also very encouraging. Backed by strong revenue-growth projections in the high single-digits, the company expects to increase its EBITDA from the current $370 million to over $450 million in next three years. Moreover, Carl Icahn (Trades, Portfolio) has initiated a 9.3% stake in the company, making any future takeover offer for the entire company, a big possibility.
That makes Nuance a bargain particularly as services like Facebook and technology companies adopt voice control technology. Car companies are currently the leaders in the field but a wide variety of other voice controlled devices including TV sets, DVD players, video game sets and probably appliances are coming. A popular use will be for home systems such as heating, air conditioning, etc. When you walk in the door you can tell the house to turn on the lights and tell the furnace what temperature you want.
The potential market for Nuance's Dragon is huge but there are some questions hanging over the field. There are some concerns that might quickly hobble the widespread application of voice recognition.
Security Concerns Threaten the Future of Talking Devices
A big drawback is security, when you type in a PIN number or password you can cover the screen or keypad and get some privacy. A person that says a PIN or password out loud just gave key information away to any would-be thief. That means some other layer of security such as software that recognizes a finger print or a retina might be needed. Another possibility is a next-generation voice recognition program that recognizes individual voices.
Unless some sort of added security interface is found it is hard to see widespread adoption of voice recognition among business mobile device makers such as BlackBerry, Nokia and Microsoft.
There is also the concern of people being able to hear confidential information being discussed by a talking device. Do you really want everybody sitting in Starbucks or McDonald's to hear your checking-account balance? This security hole can be corrected by the use of headsets but even those raise serious security problems. Wireless signals such as Bluetooth can be easily be intercepted and hacked.
Any company that can create voice-recognition software with a high level of security will win the battle for the talking-device market. At the present time, there is no indication that anybody has done this although Google is moving in that direction. Experts are even suggesting that Google Now could give Apple's Siri a tough time in the offing.
Siri, for example, couldn't tell me what time my local Starbucks would open, but Google Now could.
Nevertheless, I still believe that Nuance is currently the leader in voice recognition, which puts it in a good position to develop such a security feature. Nuance's expertise in talking device makes it a takeover target as well. The speculation that Microsoft might shell out some cash for Nuance seems to be valid.
Is Nuance a Takeover Target for Microsoft?
Nuance would be a nice fit with some of Microsoft's products such as Skype which is already widely used in business. An improved Dragon might also be a good fit with the Surface tablet and the Windows 8 operating system. Microsoft has had a hard time selling those products largely because they don't do anything that similar offerings from Apple or Google cannot. Buying Nuance could give Microsoft the edge as it moves deeper into the tablet and personal device market.
A Final Word
Software that talks is certainly the next big application but achieving widespread acceptance is something that's going to be harder than most people think. There are serious drawbacks to spoken communication such as privacy, speed, security and clarity that will have to be addressed. Although, Apple and Google have grown their technologies by leaps and bounds, it's my view that Nuance is the company best positioned to address those problems because it has the most experience in the field.