Nuance Communications (NUAN) and Microsoft Confirm Mega-Deal

Nuance Communications stock was trading sharply up in pre-market trading on April 12. On April 11, Bloomberg reported that Microsoft is in talks to buy the AI speech technology company for about $16 billion. Both of the companies officially announced the deal in pre-market trading on April 12. Should you buy Nuance Communications (NUAN) stock amid the Microsoft deal news?

Microsoft is buying Nuance for $19.7 billion. It will be Microsoft’s second-biggest acquisition after it purchased LinkedIn in 2016 for $26 billion. Nuance's technology will be used in Microsoft's health care cloud products. 

Nuance Communications is a U.S. multinational computer software technology corporation. It's an AI and speech technology company. The company makes revenues by selling tools for recognizing and transcribing speech in doctor’s visits, customer service calls, and voicemails. It's a publicly-listed company that trades on Nasdaq under the ticker symbol “NUAN.” 

On April 11, Bloomberg reported that Microsoft is in advanced talks to buy Nuance for about $16 billion. This would imply a value of about $56 per share for Nuance, which represents a premium of nearly 23 percent over its stock price on April 9. Citing people familiar with the matter, Bloomberg said that the deal could be announced as soon as this week. 

Both Nuance and Bloomberg sent out a combined announcement confirming the deal, which values Nuance for $56 per share and brings the total value to $19.7 billion.

Nuance Communications stock has climbed by 3.4 percent this year. The stock hasn't reacted yet to the news about Microsoft buying it. In pre-market trading at 8:00 a.m. ET on April 12, NUAN stock was trading up by 22.7 percent. Microsoft and Nuance have been collaborating on technologies since 2019. 

Microsoft’s stock price has climbed by 15 percent this year and has surpassed the 9.9 percent gains in the S&P 500 Index during the same period. While the stock hasn't reacted to its acquisition reports yet, in pre-market trading at 8:00 a.m. ET, the stock was trading down by -0.18 percent. 

According to Market Beat, currently, eight Wall Street analysts cover NUAN stock. The stock has one sell rating and seven buy ratings. Analysts’ consensus target price of $53.2 represents a potential upside of 16.6 percent for the stock. 

In March, NUAN was added to the best ideas list at Wedbush. Wedbush analyst Daniel Ives thinks that ARR is "the linchpin" of the Nuance story as the company aggressively goes after the Dragon Medical Cloud healthcare opportunity. The opportunity is still in the early stages and remains a core part of his bull thesis on the name heading into fiscal 2021.
 

The stock is also being discussion on stock forums, including Reddit. While some udders are bullish, others are uninterested as the stock has already run-up to match the $19.7 billion acquisition price.

Nuance Communications is geared towards the lucrative and growing healthcare vertical. Healthcare has lagged other verticals like retail and banking in digitization. Lately, the industry has seen a lot of interest, which bodes well for its outlook. Nuance is aggressive in its approach to take an increased market share of the cloud healthcare opportunity. 

The company reported revenues for the financial year ending September 30, 2020 of $1.48 billion with $91 million in net income. The company is getting into positive net income territory with its focus on the growing healthcare opportunity.

While Nuance Communications is a good company with bright prospects, the market has more or less factored in the positives in the stock prices. Nuance was already trading higher than its industry peers. The Microsoft deal values the company at more than 12.5x the EV-to-sales multiple, according to B. Riley, which is much higher than its comp group median of 9.5x. Therefore, the deal has valued the stock more or less fully and NUAN stock should rise to at least match this value. Therefore, the return runway is quite low.

Microsoft is a sound long-term investment. It's a blue-chip stock that still offers a lot of growth catalysts, including cloud services, gaming, and social media. Also, the stock is cheaper compared to its high-tech peers.