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

3) Competition is fierce

Nuance isn’t quite as special as it thinks it is. At its core, all of Nuance’s business is based upon its voice recognition technology. However, Nuance isn’t the only company that has voice recognition technology of its own. Google, among other companies, has voice recognition with error rates only single percentage points behind Nuance’s. With recognition rates so similar among companies, it is hard to justify giving any company pricing power, and it is very likely that margins will be compressed in low barrier to entry segments like Mobile.

The threat here is the same as the threat to OpenTable Inc (NASDAQ:OPEN). OpenTable is a growth business making money from online restaurant reservations. While it is a major market leader and has strong growth, the core of OpenTable’s business is easily replicable by businesses such as Google or restaurants themselves which have the infrastructure already set up through their own websites to provide OpenTable’s services. Even while at the forefront of a revolution, OpenTable is very vulnerable to competition, and this type of scenario may apply to Nuance’s mobile business as well.

At today’s prices I’m not confident that Nuance is a buy. Nuance’s healthcare business might justify most of the high price, but ultimately an investment today in Nuance implies your belief that Nuance’s mobile business will gain traction over competitors. If you’re comfortable with all the risks I’ve mentioned, Nuance is a great business with a lot of potential over the next few years.

The article Disruptive Yet Stable: A Growth Stock Oxymoron originally appeared on Fool.com and is written by Nikhil Shamapant.

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