Billionaire Carl Icahn Owns Over 9% of Nuance Communications Inc. (NUAN)

We can compare Nuance to other specialty application software companies including Open Text Corporation (USA) (NASDAQ:OTEX), Manhattan Associates, Inc. (NASDAQ:MANH), and Msci Inc (NYSE:MSCI). All of these companies also carry fairly high trailing P/E multiples- not as high as what we see at Nuance Communications Inc. (NASDAQ:NUAN), but still solidly above 20 and close to 30 in the cases of OpenText and Manhattan. However, these three companies have all been doing fairly well in terms of their recent financial performance: in their most recent quarterly report each experienced earnings growth higher than 15% versus a year ago. In each case net margins had widened but revenue growth had been strong as well. Interestingly, in some of these cases- Manhattan in particular- the sell-side is considerably less optimistic (that stock’s forward earnings multiple is 21, not too much of an improvement from the trailing results, suggesting that future earnings growth is expected to be low). Of course all three peers have some prospect of being bought out as well.

Icahn’s stake in Nuance is passive, so he seems to think that the company’s strategy is developing well as it is. We do think that speech and voice recognition provides a potentially strong market, but the recent financials don’t show the company doing very well in terms of converting its revenue growth to strength on the bottom line. We have a good deal of respect for Icahn as an investor, and so Nuance might be well placed on a watch list for further developments, but at this time the stock looks too speculative to us.

Disclosure: I own no shares of any stocks mentioned in this article.