Microsoft Corporation (MSFT): The Nuance of Voice Recognition

So, yes, Nuance Communications Inc. (NASDAQ:NUAN) is competing with $73.7 billion Microsoft Corporation (NASDAQ:MSFT). Microsoft’s stock is less volatile and has been drifting upward for the last quarter, being recently between $28 and $29. But it too has seen better days, as it was above $32 last year. Its P/E ratio is a less daunting 15.5.

But Microsoft Corporation (NASDAQ:MSFT) is well short of being a pure play when it comes to speech recognition: the Speech Recognition applet is just one feature in Windows, and Windows (contributing about $13.8 billion) makes up a little less than 20% of Microsoft’s revenue. By comparison, Microsoft’s revenue from server software was $18.7 billion, almost $24 billion came from business software (like Office), and $9.6 billion came from entertainment systems like the Xbox.

Basically, if Windows really were given away free, Microsoft Corporation (NASDAQ:MSFT) could still limp on. As for the Speech Recognition applet, there is no evidence of people rushing out to buy Windows purely for its dictation facilities. So the future of Microsoft Corporation (NASDAQ:MSFT) (unlike Nuance) is not exactly wedded to the future of speech recognition.

Looking ahead

As for the future of speech recognition, there are problems that it has to overcome. Dictation may be easier to learn than typing, but you do have to learn it, and dictation can feel strange and alien if you already know how to type. These can be serious impediments for casual typists, but trivial considerations for those facing carpal tunnel syndrome. Either way there is a significant number of people who could profit from speech recognition, and the market is a long way from saturation.

As for Nuance as an investment, apparently Icahn liked it. The one-year estimate shown by Yahoo! is 27.08, indicating that no contributing analyst saw any serious reason to dislike the stock. I don’t know if I’m that bullish on it, but its products offer real benefits and so its market—and therefore its revenue and stock price—is likely to continue to grow.

Lamont Wood has no position in any stocks mentioned. The Motley Fool recommends Nuance Communications. The Motley Fool owns shares of Microsoft and Nuance Communications.