Cerence (CRNC) Stock Analysis: Buy or Sell?

We have noticed in our trading platforms that there is a stock running quite hot at the moment, Cerence (CRNC), so we wanted to take a bit of time in knowing more about Cerence, with our usual analysis going from the background of the company, Cerence’s earning reports, stock performance, most important deals and partnerships with Cerence, ending with the analysts opinion to see if Cerence is a buy or a sell. So let’s start!

Background of Cerence

Cerence Inc. (listed on NASDAQ as CRNC) is a global leader in artificial intelligence (AI) for the automotive industry. It was part of Nuance Communications until they spun off from them in 2019. Since then, Cerence has established itself as a pioneer in voice recognition, conversational AI, and intelligent mobility solutions. The company’s technology powers voice assistants, navigation systems, and other connected features in vehicles manufactured by major automakers worldwide.

With a mission to redefine in-car experiences, Cerence has focused on building scalable and innovative platforms that enhance driver and passenger interactions. Its AI-driven solutions not only improve convenience and safety but also align with the industry’s shift toward autonomous and electric vehicles (EVs).

What Does Cerence Do?

We briefly discussed it, Cerence provides cutting-edge AI-powered solutions for the automotive sector, including:

1. Conversational AI: Voice assistants capable of natural language processing to execute commands and provide contextual responses.
2. AI-Driven Navigation: Enhanced navigation systems that integrate real-time traffic updates and user preferences.
3. Personalisation Features: AI-powered tools that adapt to individual driver preferences, such as seat positioning and climate control.
4. Safety Enhancements: Features like voice-activated controls to reduce driver distraction.
5. Connected Ecosystems: Solutions that integrate cars with smart homes and IoT devices.

Cerence’s products are integral to the user experience in connected cars, with its software embedded in more than 400 million vehicles globally!! Is this just the start?

Recent Earnings Report

Having a look on its most recent quarterly earnings report, the one that ended on September 30, 2024, Cerence shared the following financial highlights:

• Revenue: $90.2 million, reflecting a 5% year-over-year increase, driven by higher demand for conversational AI solutions.
• Subscription Revenue Growth: Recurring revenue from subscriptions grew by 15%, showcasing the success of Cerence’s transition toward a SaaS model.
• Adjusted EBITDA: $21.7 million, compared to $18.5 million in the prior year, representing improved profitability.
• Net Income: Reported net income of $7.2 million, or $0.18 per diluted share, compared to $4.8 million, or $0.12 per share, in the same period last year.
• Cash and Cash Equivalents: $155 million as of September 30, 2024, providing the company with a strong liquidity position to support strategic initiatives.

Cerence has reiterated its guidance for the fiscal year 2024, targeting revenue between $360 million and $380 million, with a focus on expanding its SaaS offerings, but looking at this quarter of $90.2 millions, 4 quarters of that same revenue would be $360 millions, so if we go to the higher case of $380 millions, they are expecting about 5.5% growth in the best case.

Stock Performance

As of January 6, 2025, Cerence’s stock is trading at $24.22 per share, massively above its 52-week low of $2.34 and just slightly below Cerence’s 52-week high sitting at $24.27. The company’s market capitalisation stands at approximately $831 million, based on its outstanding shares. This stock is quite volatile at the moment, so every minute you could get quite a high stock price difference.

The stock has been under pressure in recent months due to broader market challenges affecting tech stocks and concerns about the pace of the automotive industry’s recovery. However, long-term investors remain optimistic about Cerence’s role in the future of connected vehicles and the stock has picked up 800% in just the last 3 months.

Key Partnerships and Developments

So let’s see where are they focusing their business. Cerence has been actively expanding its ecosystem through strategic partnerships and innovative product launches, we are just highlighting the most ‘important’:

1. Expansion of SaaS Offerings: Cerence continues to transition from a licensing model to a subscription-based model, unlocking new revenue streams and building long-term customer relationships. This is what most of the companies are doing now, they love recurring revenue.
2. Collaboration with Major Automakers: Recent partnerships with leading global automakers to integrate Cerence AI into next-generation EVs and autonomous vehicles.
3. Advances in Multimodal Interaction: Introduction of AI tools that combine voice, gesture, and visual recognition for a seamless in-car experience.
4. Regional Growth: Increasing adoption of Cerence solutions in Asia-Pacific markets, driven by the rapid growth of EVs in the region.

Valuation: Is Cerence a Good Value?

Cerence’s price-to-sales (P/S) ratio stands at approximately 2.5, which is lower than many AI-focused companies, reflecting a potential undervaluation, however looking at how is flying the stock price, it doesn’t look like a good value. In the good side, we can say that the company’s efforts to shift toward a recurring revenue model could enhance its valuation over time as it stabilises cash flow and improves margins. It will depend on how the automotive sector goes in the near future as we have seen big brands such as Volkswagen suffering.

Analyst Ratings and Future Projections

Time for professionals! In this case, the analysts have a mixed outlook on Cerence, with an average price target of $30.00, suggesting potential upside from current levels. Key projections include:

• Revenue is expected to grow at a CAGR of 8% over the next five years, driven by rising demand for connected car technologies.
• The company is projected to achieve adjusted EBITDA margins of 25% by 2026, reflecting operational efficiencies and higher subscription revenues.

Should You Buy or Sell Cerence Stock?

Similarly to other hot stocks that we have reviewed recently we think Cerence appears to be a speculative buy for investors looking to capitalise on the growing adoption of AI in the automotive sector. The company’s strong market position, innovative product offerings, and transition to a SaaS model are key drivers for long-term growth. However, the valuation seems to be too high for the projected growth rates. We always recommend investors should remain cautious of near-term challenges, including supply chain disruptions and macroeconomic headwinds, but on this case, also aware of the massive swings on the stock price.

Investors with a long-term perspective may find Cerence an attractive opportunity to participate in the AI-driven transformation of the automotive industry while could be also other that are just looking for the short-term gains if you manage to time the market (which normally is unlikely)