In this article, let's take a look at Nuance Communications, Inc. (NUAN, Financial), a $4.98 billion market cap company that is a provider of voice and language solutions for businesses and consumers around the world.
Revenues and net income
Looking at profitability, revenues grew by 1.22%, but earnings per share decreased in the most recent quarter compared to the same quarter a year ago (-$0.17 vs -$0.11). The net income has tremendously decreased by 55.1% when compared to the same quarter one year ago, from -$34.97 million to -$54.25 million.
Margins
The gross profit margin is considered high, at 60.56% but it has decreased when compared to the same quarter of one year prior. Although the net profit margin is negative, it is ranked higher than 52% of the 2055 Companies in the Software - Application industry.
Profitability
Let´s compare the best measure of performance for a firm's management: the return on equity. The ROE is useful for comparing the profitability of a company to that of other firms in the same industry.
| Ticker | Company | ROE (%) |
| NUAN | Nuance | -5.77 |
| OTEX | Open Text Corp. | 16.57 |
| FDS | FactSet Research Systems, Inc. | 40.18 |
| INFA | Informatica Corp. | 8.88 |
| PTC | PTC Inc. | 17.03 |
| Â | Industry Median | 7.1 |
The company has a current ROE of -5.77% which is lower than the industry median and the ones exhibit by Open Text (OTEX, Financial), Informatica Corp. (INFA, Financial) and PTC Inc. (PTC, Financial). In general, analysts consider ROE ratios in the 15-20% range as representing attractive levels for investment. So for investors looking those levels or more, FactSet Research (FDS, Financial) could be the option. It is very important to understand this metric before investing, and it is important to look at the trend in ROE over time.
Relative Valuation
In terms of valuation, the stock sells at a price-to-book ratio of 2.0x which indicates a discount versus the industry average of 3.33x while the price-to-sales ratio of 2.6x is below the industry average of 2.68x.
As we can see in the next chart, the stock price has an upward trend in the five-year period.
Final comment
As outlined in the article, we saw strength when analyzing the revenue growth. To be honest, that growth is since its merger with ScanSoft in 2005.
Further, more than 40% of the company's revenue comes from the health-care segment. The main reason is the augmented demand from doctors for mobile accessibility to use with its patients. Nuance focuses on new mobile applications which intend to improve messaging and other functionalities in smartphones.
However, we also find some important weaknesses like a deteriorating net income, a negative ROE and a stock price performance that could be better. We must mention that the relative valuation could make me feel bullish on this stock.
Hedge fund gurus like Ray Dalio (Trades, Portfolio), Paul Tudor Jones (Trades, Portfolio) and Jim Simons (Trades, Portfolio) bought the stock, while George Soros (Trades, Portfolio), Murray Stahl (Trades, Portfolio) and Manning & Napier Advisors, Inc. added this stock to their portfolios in the third quarter of 2014.
Disclosure: Omar Venerio holds no position in any stocks mentioned
