Why Nuance Communications Jumped 10% This Morning

Fire breathing dragon

What happened

Shares of Nuance Communications (NASDAQ: NUAN) , maker of the popular "Dragon NaturallySpeaking" speech-to-text software, jumped more than 10% in early Thursday trading after the company reported fiscal Q3 2018 earnings results that broadly met Wall Street's expectations.

Nuance reported the $0.27 per share in pro forma profits that it was expected to report. Sales fell just short -- $502.9 million versus analysts' expected $506 million. Its shares were still up a healthy 9.1% as of 2:15 p.m. EDT.

So what

That's the good news. The bad news is that Nuance really lost $0.05 per share when calculated according to generally accepted accounting principles (GAAP)-- although this was better than the $0.10 per share it lost in the year-ago quarter. Also, the sales number that missed estimates was only up 3% year over year, which isn't much of a gain for a "growth" stock in the tech industry.

Meanwhile, the strong cash flow that has been one of Nuance's few redeeming traits of late faltered in fiscal Q3. Operating cash flow shrank nearly 25% to $99.7 million. Fortunately, capital spending also declined, leaving Nuance with a respectable $86.1 million in cash profit produced in Q3.

Now what

Year to date, Nuance has generated a total of $256 million in positive free cash flow, a result far superior to its apparent $125 million accounting loss under GAAP. Run-rated over the course of the remainder of the year, Nuance appears to be on course to generate cash profits in excess of $340 million, which would value the stock at less than 15 times earnings.

A growth rate of 3% probably won't be enough to justify that price, but if Nuance can produce anything in the neighborhood of "double digit percentile growth," that just might make the stock worth a look -- and for what it's worth, S&P Global Market Intelligence estimates show Nuance growing earnings at 12% annualized over the next five years.

10 stocks we like better than Nuance Communications

When investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor , has quadrupled the market.*

David and Tom just revealed what they believe are the 10 best stocks for investors to buy right now... and Nuance Communications wasn't one of them! That's right -- they think these 10 stocks are even better buys.

Click here to learn about these picks!

*Stock Advisor returns as of August 6, 2018

Rich Smith has no position in any of the stocks mentioned. The Motley Fool recommends Nuance Communications. The Motley Fool has a disclosure policy .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

More Related Articles

Sign up for Smart Investing to get the latest news, strategies and tips to help you invest smarter.