Disruptive Yet Stable: A Growth Stock Oxymoron – Apple Inc. (AAPL), Nuance Communications Inc. (NUAN)

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Nuance Communications Inc. (NASDAQ:NUAN) is a voice and language solutions provider. Essentially the company uses proprietary voice recognition technology to solve problems for customers in health care, mobile and enterprise areas. The nature of each of Nuance’s business segments is dramatically different, making Nuance one of the more unique growth stocks I’ve ever seen.

The mobile and health care businesses essentially make up Nuance Communications’s identity. The mobile business is Nuance’s disruptive growth area. Nuance has strong relationships with all sides of the smart phone equation, providing voice recognition solutions across the breadth of the market.

Nuance Communications Inc. (Nasdaq:NUAN)

The smart phone market is currently a warzone with a huge battle by the top three players for market share. Apple Inc. (NASDAQ:AAPL) controls much of the luxury smartphone market with the iPhone 5 and 4S devices, and many investors worry that Apple Inc. (NASDAQ:AAPL), having saturated its wealthier markets will have a hard time growing in the future due to inability to grow in the low-end smartphone arena. Meanwhile, Samsung, and Google Inc (NASDAQ:GOOG)’s Android by extension, are achieving high growth in the low-end smartphone markets, having grown market-share from 23% to 29% in the last quarter.

While the smartphone industry seems cut-throat, Nuance has been able to enter the market from both sides through relationships with Apple Inc. (NASDAQ:AAPL) and their Siri voice recognition assistant and a partnership with Samsung, which uses Nuance technology in its Samsung Galaxy S III and should profit no matter what side wins. Moreover, the segment is bolstered by innovation and growth in other areas. Nuance started providing voice solutions for TV’s, and their Dragon TV product, partnering with LG Display, has already been sold through 750,000 TVs.

Nuance’s Dragon Drive solution is another disruptive growth area as they’ve developed partnerships with Ford Motor Company (NYSE:F) , GM, BMW, and Audi among others. Ford is targeting 13 million of its customers alone to use its voice activated systems by 2015, 3.5 million of which will be European customers. Thus far, 20 million voice enabled cars use Nuance’s technology. Nuance has also added Hyundai and Chrysler as new customers this year.  In terms of innovation and disruption, Nuance has a wide breadth of market opportunities it still has to tap. They’ve begun a voicemail to text service that has already transcribed 1 billion voicemails and have many other doors like this to open for money to potentially be made.

Healthcare: Nuance’s main asset isn’t fully appreciated

Nuance’s health care business uses the same trademark voice recognition product to make health care services more efficient. Nuance is trying to revolutionize the transcription of doctor’s notes by making an automated voice recognition-based process, and they’re even trying to get involved in hospital document processing as they provide coding solutions for hospitals. The ultimate goal seems to be involvement in all phases of the process: the creation of the document by the doctor and the coding and storage of the document.

While the mobile business gets a lot more attention for its disruptive potential, the health care business is Nuance’s bread and butter. Much of the health care revenue is based upon volume of lines transcribed making it a recurring revenue source for Nuance. The barrier of entry into this business is growing with Nuance’s revenue.

Annualized line run rate in Nuance’s healthcare business

As you can see, the annualized line run rate is quickly increasing, and with it Nuance’s health care position is becoming ever more entrenched. According to their financial analyst day transcript from December 2012, Nuance has surpassed 450,000 physicians that directly use Nuance products. It’s important to note that according to this source, there are slightly over 830,000 active professional physicians in the US, meaning that Nuance has directly engaged over 53% of its market. Nuance has shown clear market dominance and a clear need in the marketplace for its product.

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