Most smartphones today come with voice-recognition software: You speak a question into your phone and the results come back to you via the wireless web.
That's what Siri is - the first-ever "voice bot" launched in 2011 via the Apple Inc. (Nasdaq: AAPL) iPhone 4S.
And now Microsoft has introduced "Cortana" - and let me tell you, she's awesome.
Cortana can search the Internet, set up reminders, shift calendar appointments, manage your mishmash of meetings, find restaurants, send text messages, and place phone calls. And she only seems to get better the more I deal with her.
Based on a 26th-century artificial intelligence (AI) character in the smash hit "Halo" videogame series, Cortana made her grand entrance as part of Windows Phone 8.1 - the key new update for Microsoft's mobile operating system (OS).
Microsoft's decision to enter the voice-recognition field means this technology has now passed the so-called "tipping point." By that I mean it's no longer just a cool "nice-to-have" feature - it's an integral part of personal computing.
And Microsoft believes Cortana can advance a tech platform that will change the way we interact with our mobile devices, our cars... and even our homes.
Because we understand this, we have an advantage. We've identified a small-cap leader that plays a key role in just about every aspect of voice-recognition technology, landing it squarely on our "stocks to buy" list.
Voice Recognition: A New Market
I'm big believer in voice recognition. I use it all the time to send text messages to my wife and kids. Ditto when I want to quickly reply to an email on my iPhone.
Not only that, but I also use it in my Acura MDX almost daily. When I want to make a call or set my navigation system to a new address, I just push a button and talk to the friendly female voice assistant.
I got immersed in "voice-rec" technology with the introduction of the Apple iPhone 4S in the fall of 2011, which Apple used to launch Siri (hence the "4S" designation) - the first voice bot truly designed for the masses.
The market has grown from there. Google Inc. (Nasdaq: GOOG, GOOGL) offers a digital voice assistant for mobile phones running its Android operating system through its "Google Now" service. And now Microsoft has entered the fray.
And while each of these three giants has strong entries in the voice-recognition market, none is the kind of "pure play" that offers maximum profit opportunities... like the one I want to share with you now.
This small-cap leader made its name as the technology behind Apple's Siri. But the firm's science, engineering, and market understanding run much deeper than that.
In fact, the company actually traces its roots back to two legendary tech pioneers. The first is Ray Kurzweil, the noted futurist and author, who founded an optical character-recognition firm back in 1974.
The second is SRI International, a spin-off of Stanford University. In 1994, the forerunner of Nuance was itself spun off from SRI to commercialize speech-recognition technology originally developed for the U.S. government.
What followed was a series of complex mergers and acquisitions that in 2005 created the current Nuance Communications.
Let's take a closer look at this important player.
Stocks to Buy: Nuance Communications (Nasdaq: NUAN)
Today, Nuance is a thriving multinational software company specializing in both voice-recognition and imaging technology. It has about 4,000 patents covering all aspects of both tech fields.
Nuance services a dozen industries, including mobile, automotive, legal, and medical. The company has more than 1,200 speech scientists. No wonder it has a voice assistant that speaks 38 languages: The company works with more than 2,000 global partners.
Some analysts have suggested dark days are ahead for Nuance because Apple has recently shown an interest in moving voice tech in-house. And it's true that Apple recently purchased Novauris Technologies for an undisclosed sum. Apple hasn't commented, but the trade press says Apple bought Novauris specifically to beef up Siri.
However, that doesn't necessarily mean Apple will end its relationship with Nuance. After all, Novauris itself was a spin-off of Dragon Systems, a voice tech firm owned by - Nuance.
But let's just assume that Apple and Nuance stop working together. I don't think that spells disaster for Nuance. Far from it.
Nuance has developed an advanced Cloud-based artificial intelligence app dubbed Project Wintermute. Not only does it work on smartphones, but it also works with smart TVs and other web-connected devices.
In a test of Wintermute's capabilities last summer, Forbes said the software could seamlessly tell users how many points their favorite basketball player scored, or even show a game on TV based on a user's viewing patterns and a simple dictation such as "Throw on the game."
But Nuance isn't banking solely on the success of Wintermute. The company simply plays too big a part in the global tech ecosystem to let the loss of one customer, even a prestigious one, hold it back.
Consider that Nuance is already an automotive powerhouse...
Nuance's Voice Tech Is Essential to Automotive and Healthcare Sectors
Nuance's Dragon Drive is an innovative voice-recognition platform that is becoming a key part of today's tech-centric automobiles.
Dragon Drive allows users to sync destinations and other valuable data from their mobile devices that can be activated via voice commands while driving.
A motorist using the software can also seamlessly transition from getting GPS directions, to sending an e-mail, to posting on social media - all through Dragon Drive built into the dashboard.
This explains why it already works with Detroit's Big 3 automakers as well as such foreign nameplates as Hyundai Motor Co. (OTC: HYMTF).
All told, Nuance has placed its speech technologies in more than 90 million automobiles.
Nuance also sets the standard for medical voice recognition, a field that accounts for about half its sales.
During this year's first quarter alone, Nuance signed 12 new healthcare clients. It also expanded its longstanding relationship with the U.S. Department of Veterans Affairs, which has roughly 9 million vets receiving health services.
Nuance also has scored with its Dragon Medical 360, a software package that provides essential documentation solutions to more than 300,000 physicians. It allows doctors to orally fill out patient forms for electronic records and is intuitive enough to make corrections based on stored patient data.
Lawyers also use voice recognition like Nuance's Dragon NaturallySpeaking. The software helps them prepare documents for court and perform data entry - all by spoken command.
And consumers turn to Nuance for products like Voice Control 2.0 and Dragon mobile apps to dictate various commands throughout their day.
Nuance: A "Special Situation" Play with Plenty of Upside
At a recent price of $16.25, Nuance has a market value of about $5 billion. The stock is trading at a forward price/earnings (P/E) ratio of about 13, a discount of nearly 40% from the 18 multiple of the Nasdaq 100.
Yes, the company needs to improve its financials. It has continued growing sales over the last several quarters, but is losing money. In this year's first quarter, Nuance posted a net loss of $55.4 million on sales of $470 million.
But this is a "special-situation" play with plenty of upside.
Nuance's share price zoomed steeply in late 2011 and early 2012 on speculation that Apple would buy the power behind Siri. When that didn't happen, the stock sold off from the high it had reached at roughly $30 a share.
So if the stock could just return to its two-year high, we'd be looking at a double from here.
No wonder billionaire investor Carl Icahn has increased his stake in the company. According to MarketWatch, he recently added nearly 1 million shares to his stake, bringing his total Nuance holding to 60.8 million shares.
Last August, the company adopted a "poison pill" to block a hostile takeover. But Icahn still bought more stock.
Icahn is normally quite chatty about his holdings. But he's had nothing to say about his Nuance investments.
This much is clear: This is an opportunity to invest in a firm that offers the broadest portfolio of technology in the growing sector of voice recognition. And we believe you'd be doing so at a discount price level.
As such, it belongs in the high-risk portion of your portfolio.
But investors who are patient enough to watch the company rebuild its finances over the next few quarters would do well to put Nuance on their "stocks to buy" list - because they could be richly rewarded.
We'll be watching.
And so will Cortana.
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