Be Wary of Nuance

By Eric Jackson, Senior Contributor09/28/11 - 06:00 AM EDT


NEW YORK (TheStreet) -- I used to work in the voice recognition industry. That was 11 years ago.

Back then, voice rec was often touted by many as the next big thing.

Guess what, it's still the next big thing.

There were some great people who worked in the industry. Mike McCue started Tellme which eventually got sold to Microsoft(MSFT_) after raising a boatload of money from high-prestige Valley VCs. He's now the founder of popular private iPad reading company Flipboard. McCue is so admired; he's on the Twitter board.

Therefore, when I hear about how the Siri personal assistant is going to be integrated into the next version of the Apple(AAPL_) iPhone 5, I'm excited as a user of the technology, but I would be cautious about running out to buy Nuance(NUAN_) just because it's in the voice rec space.

You need to recognize that the incredible bounce Nuance shares -- 10% in the last five trading sessions -- is all about iPhone 5. And you probably be positioning yourself for an inevitable pullback in Nuance shares after the iPhone 5 launch, rather than piling in.

Nuance is a huge industry roll-up. Back when I was in the industry, there were about a dozen speech recognition vendors (who built software to recognize people's voices). Today, there's basically one: Nuance. SpeechWorks, Nuance, and Lernout & Hauspie all got rolled up into one.

As that happened, Nuance got a lot of extraneous businesses. Like medical transcriptions. There's a big part of Nuance that just involves saving doctors' transcriptions and sending them to Bangladesh every night to be typed out.

So, when people get excited about Nuance stock today, it's usually because they assume that Apple will buy them. However, Apple likely doesn't want to be in the Bangladesh transcription business.

What if Google(GOOG_) bought Nuance? It's possible. Google has been doing more and more in speech rec over the last few years and have hired a number of talented people from the industry. I suspect they feel they have enough good people in the area for what they need.

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