Nuance Communications Inc – Overstretched lossmaking entity.

Nuance Communications Inc (NASDAQ: NUAN) is a software provider that leverages artificial intelligence-based innovations to increase productivity and security. It caters to 85% of the Fortune 100 partners.

Investment Rationale – Expensive at USD 45.20

• From a technical standpoint, 14-day RSI (56.71) is hovering around the overbought position, and therefore, a short-term dip can be anticipated.
• The Company looks overvalued, considering its weak fundamentals.
• The gross margin has been below 56% over the past four years (FY17 to FY20), while the industry median is above 76%.
• During Q1 FY21, the Company reported a GAAP net income of US$7.0 million, against a net income of US$43.6 million in Q1 FY20.

Risk Assessments

• The Covid-19 pandemic can adversely impact business operations with delay or cancellation of contracts.
• Moreover, the Company is also facing intense competitive pressure and fluctuations in demand, which can put pressure on the margins.

Recent News

8 February 2021: Nuance announced the acquisition of Saykara, which will strengthen the NUAN’s technology portfolio.

Financial Highlights for the first quarter ended 31 December 2020 (as 8 February 2021)

 (Source: Company Website)

• During Q1 FY21, the Company demonstrated strength in Revenue and EPS, and therefore, exceeded the guidance expectations.
• The GAAP revenue stood at US$345.8 million, while the diluted earnings per share were US$0.02.
• The Group continued to advance the strategic initiatives, accelerated cloud transition, and delivered a solid performance in cloud-offerings, and thus, 28% year-on-year growth in cloud revenue.
• The Group also announced the disposal of medical transcription.

Share Price Chart    

 (Source: Refinitiv, Thomson Reuters)

Valuation Methodology: Price/Earnings Approach (NTM) (Illustrative)

Conclusion

The Company reported significant losses in Q1 FY21, while its liquidity and operations are significantly impacted by the Covid-19 pandemic. Moreover, the market in which the Company operates is highly competitive and rapidly changing, which can to fluctuation in sales, customers orders, and volumes. Also, the Company has a history of operating losses, and may require additional capital to pursue the growth objectives. Therefore, it is prudent not to invest in the stock in the current scenario. Stock 52 week High and Low were USD 51.62 and USD 14.17, respectively.

Based on the weak fundamentals, heightened uncertainties, and valuation conducted above, we have given an “Expensive” stance on Nuance Communications Inc at the closing price of USD 45.20 (as on 22 March 2021), while we look forward to reviewing the Company when the Company started reporting profitability.   

Express Inc – Adversely impacted by the Covid-19 pandemic.

Express Inc (NYSE: EXPR) is engaged in a speciality apparel business that offers accessories and apparel for work, jeanswear, casual, and going-out. It operates more than 500 factory and retail outlets.

Investment Rationale – Expensive at USD 4.64

• From a technical standpoint, 14-day RSI (56.20) is hovering around the overbought position, and therefore, a short-term dip can be anticipated.
• All the major profitability margins (gross margin, operating income, and net margin) have been into the negative zone in FY20, while the industry median reported positive figures.
• The Covid-19 pandemic materially impacted the sales in FY21, and thus, liquidity significantly decreased at the end of FY21.
• Net losses got worsened significantly in FY21, and therefore, the Company had to increase its borrowings.

Risk Assessments

• The challenging macroeconomic conditions can impact consumer spending.
• The Covid-19 pandemic continued to put customer traffic, and store reopening at risk.

Recent News

14 January 2021: EXPR raised US$140 million to strengthen liquidity through new financing loan agreements.

Financial Highlights for the 52 weeks ended 30 January 2021 (as on 10 March 2021)

 (Source: Company Website)

• During Q4 FY21, net sales declined 29% year-on-year to US$430.3 million, since the outlet sales decreased 27% year-on-year.
• Similarly, net sales plunged 40% year-on-year in FY21, while the operating loss aggravated to US$455.2 million in FY21 from a loss of US$217.9 million in FY20.
• At the end of FY21, long-term debt was US$192.0 million, while the cash and cash equivalents stood at US$55.9 million.

One Year Share Price Chart    

   (Source: Refinitiv, Thomson Reuters)

Conclusion

Due to the challenging trading environment, revenues declined massively in FY21 and losses aggravated more than double. Similarly, diluted loss per share in Q4 FY21 was worse than even Q4 FY20. Moreover, the Company’s liquidity has declined considerably in FY21, and hence, Express might need to relay on external funding for pursuing growth objectives, which can attract hefty borrowing cost too. In such a scenario, it is prudent not to invest in the stock, and wait for the right opportunity when the market recovers. Stock 52 week High and Low were USD 13.97 and USD 0.57, respectively.

Based on the reduced liquidity, absence of profits, and uncertain market conditions, we have given an “Expensive” stance on Express Inc at the closing price of USD 4.64 (as on 22 March 2021), while we look to reviewing the upcoming financial and operational updates.   

*All forecasted figures and Peer/Industry Information have been taken from Refinitiv, Thomson Reuters.

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