Now hear this! Jill Malandrino and Skip Raschke of Options Profits team up to give you a bullishly-biased, longer-term options strategy in this voice and language solution innovator.
Jill: Nuance (NUAN) has four lines of business: Health Care Solutions, Mobile and Consumer Solutions, Enterprise Solutions, and Imaging Solutions. Apple (AAPL) uses NUAN as the application for its iOs. I have stated many times that AAPL is not where I want my capital, but I do like the names that have exposure to it. This is not some hot, new name that is recently on the radar because AAPL gave its "blessing". Here is a very interesting article from the New York Times that dives deeper into voice technology and indicates NUAN's technology paved the way in the space.
Management expects revenues from NUAN's Wintermute hybrid solution with Intel (INTC) across a number of platforms in 2014. NUAN has terrific business with smartphone users, and reported results being particularly strong in Asia. In addition to being a key supplier for both AAPL and INTC, Samsung is also a user of the technology and it is taking the smartphone market by storm.Hhere is the list of other well-known, global companies employing NUAN (in addition to AAPL and INTC): Amazon (AMZN), Audi, BMW, Comcast (CMCSA), Chrysler, Dell (DELL), DoCoMo, Ford (F), Volkswagen, General Motors (GM), HTC, Huawei, Kyocera, LG, Oi, Nokia (NOK), INTC, IBM (IBM) (my favorite core portfolio holding), Panasonic, Pantech, Prosodie, BlackBerry (BBRY), Sony (SNE), Telefonica, Telstra, T-Mobile and ZTE. Major automobile manufacturers and almost all smartphone players are on the list. The gross margin, which has remained around 70% for six years, is also an excellent indication of weak competition.
Mobile and Consumer Solutions' business has the greatest potential for NUAN. The advantage of voice interface for automobiles is extremely obvious for safety reasons, and I expect all major car manufacturers will adopt this technology. The revenue in 2012 for Nuance in Mobile and Consumer Solutions was $508 million, with a profit of $228 million. The organic revenue growth was 23%. Given the market potential, the growth will see strong acceleration in the next two to five years.
The chart is not particularly outstanding or a reason to buy or sell right now, but it does setup for a an interesting longer-term play. Yes, it recently hit a 52-week low, but I think this suggests the bottom is in, and and with margins so attractive in this high-barrier-to-entry space, we may have a unique opportunity to get in early. Let's turn it over to Skip and the what his work is telling us.
Skip: Texting should be easily done by voice instead of hunting and pecking script on a miniature keyboard. Maybe as if in a full cycle of modern technological advancement, voice recognition relative to the printing of the spoken word is only one step away from that process ironically being once again known as a phone call. NUAN is one of the premiere companies in this technology sector known as voice recognition. For 20+ years now NUAN has been improving upon what has to be the future of human communication.
A nuance as I think of the word is a subtle, defined distinction of a meaning or opinion. NUAN, the stock, is not subtly traded, not since about five, or so years ago, when NUAN began to gain more volatility in its daily price fluctuations. You can see that on this longer-term chart.
A month ago NUAN did a defined and distinctive nose dive in price as the market's opinion of the stock went from bullish to bearish rather quickly. That move, from February 7th to the 13th was not subtle as the stock dropped from 24+ to 18+. The excuse for the tumble was that NUAN missed on the first quarter's net profit. Toss onto that stock price pyre a few brokerage downgrades to neutral and NUAN longs were toasted.
When I see wholesale dumping like the NUAN selling last month I begin to look at the rebound potential. If the decline is just the beginning of a trip to the graveyard that potential will most times be found in the fundamentals. Technicals, thus are a waste of time in that case, if not a siren calling the trader/investor into the proverbial rocks.
As I read the fundamentals of NUAN I see a growing company with a very good potential future in an industry that has tremendous upside ahead. NUAN is trading at a forward P/E of only 9X. When a stock gets tattooed as NUAN did the factor of time must be extended for the stock to recover. Thus an options trade in NUAN is best served by using a longer term expiry month. The tactic is like is the bullish vertical call spread.
Trades: Buy to open 3 NUAN October 18 calls for $2.40 and sell to open 3 NUAN October 23 calls at $0.70.
The total risk for the trade is $1.70. As always, we will monitor the trade on this site in the comments section below.
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