From Boom To Bust: Cerence’s Declining Market Share And Financial Turmoil — Shall I hold or exit?
In the dynamic realm of finance, few narratives resonate as deeply as the journey of Cerence Inc. (CRNC). Once hailed as a burgeoning force in automotive software under past leadership, boasting a market capitalization exceeding $4 billion, CRNC has since nosedived to a fraction of its former value, hovering at less than $400 million. Shareholders find themselves grappling with significant losses amidst this staggering downturn.
I started investing in the company around Feb 2021, when stock was around $120 and since then the stock has come down to $9.60 range. This has made me do a deeper analysis on what went wrong here.
Amidst the wreckage, several conspicuous elements emerge: the CEO Stefan Ortmann’s hefty $14 million yearly compensation, misleading market share with one-time revenue accounting creating false sense of growth, high-profile executives departures — prompting serious inquiries regarding accountability and the erosion of value.
In 2019, Cerence CRNC was spun off from Nuance Communications to become an independent company, focusing on automotive voice assistant technology. Cerence’s product is speech recognition solutions for automotive OEMs. Automotive voice assistants offer a range of features designed to enhance the driving experience and improve safety. These include voice-activated navigation, real-time traffic updates, personalized recommendations, smart home integration, remote vehicle control (such as locking/unlocking doors or starting the engine), and proactive assistance (such as reminders for scheduled maintenance or refueling).
Competition
The top voice assistants with which Cerence Voice Assistant competes with include the top players like -
1) Amazon Alexa: Developed by Amazon, Alexa powers the Echo line of smart speakers and a wide range of third-party devices. It offers extensive skills and integrations with various smart home devices, services, and applications.
2) Google Assistant: Integrated into Google Home speakers, Android devices, Android Automotive and an array of third-party products, Google Assistant provides robust voice interaction, search capabilities, and smart home control and also is available through Android Auto in automotive.
3) Apple Siri: Siri is Apple’s voice assistant, available on iPhones, iPads, Macs, Apple Watch, HomePod, and AirPods. It is enabled in Automotive through Car Play and offers features like voice commands, reminders, and smart home control.
4) Apple Car Play & Android Auto — Freely available on all user iOS and Android phones and can be connected to car infotainment using Bluetooth.
Until 2020, Cerence products dominated the OEM market but have since ceded ground to free and alternative solutions. By the end of 2023, 98% of new cars supported either Apple CarPlay or Android Auto, indispensable features for nearly 80% of new car buyers. These smartphone integration platforms offer seamless connectivity, contrasting with Cerence’s in-car voice assistant, which lags in technology and performance. Comparatively, Apple CarPlay and Android Auto provide superior user experiences and seamless connectivity through Bluetooth. A simple test is to reflect on one’s usage and experience with the in-built car voice assistant versus home assistants like Google or Alexa, or Apple CarPlay and Android Auto.
Stock Performance
Cerence’s CRNC stock performance has been dismal in recent years, reflecting the company’s declining revenue and bookings, along with confusing metrics and contract consolidations. The stock has plummeted by 63.23% over the past year.
Here’s a snapshot of key points:
⦁ September 2019: Cerence’s earliest available price hovered around $10.57.
⦁ June 2020: The stock experienced a significant surge, reaching $40.09, peaking at $71.81 by November 2020.
⦁ January 2021: Cerence reached its pinnacle at $112.15, followed by a further climb to $120.32 in February 2021.
⦁ Mid-2021: Subsequently, there was a gradual decline, with the stock dropping to $88.31 by May 2021.
⦁ February 2022: Cerence’s stock sharply declined to $45.48.
⦁ June 2023: Despite intermittent recoveries, the stock briefly rose to $30.38 in June 2023.
⦁ January 2024: However, the price saw another downturn, hitting $19.67 in January 2024, and has since continued its descent, currently resting at $9.60.
Decline in Market Share
The decline from its peak could be attributed to Cerence CRNC losing its major market share to competitors and alternative free technology. A cursory examination of the top worldwide Automotive OEMs and their chosen Voice Assistant technology reveals that Cerence technology is no longer preferred by these OEMs.
Below is a table showcasing the top OEMs along with the Voice Assistant technology they currently utilize.
Between late 2021 and early 2022, Burlington-based digital assistant software maker Cerence experienced a wave of high-profile executive departures. This exodus indicates a lack of confidence among management regarding the CEO’s direction & technology failures, as they chose not to align with the company’s vision. As CRNC shares trade well below their initial public offering price, investors have suffered losses. Meanwhile, Stefan Ortmanns, who has lead this Business Unit since Nuance Communications spinoff in 2021, was generously compensated by Cerence’s board. According to a public securities filing dated Jan. 5, he earned approximately $14.4 million in total compensation last year, a significant increase from his $5.3 million total pay in 2022. This discrepancy raises questions about the CRNC board’s approach to rewarding performance.
Cerence Financials
Upon closer examination of the chart above, it reveals that the company’s revenue for 2023 amounted to $294 million. However, for fiscal year 2024, CRNC provided guidance for full-year revenue in the range of $355–375 million, suggesting a growth rate of over 20–27%. Yet, this projection includes $77.7 million of deferred revenue accelerated due to an early termination agreement related to the Toyota “Legacy” contract, as well as $20 million from fixed contracts. Consequently, the expected revenue for CRNC in 2024 is effectively $257 million, indicating a decline of $37 million compared to 2023, representing a -13% decrease in revenue.
If you take into effect the above, the revenue table should look like this
A quick look at CRNC KPI metrics disclosed by CEO & CFO shows how continently bookings number has been eliminated from the metrics. If you look in the past CRNC under previous CEO Sanjay Dhawan, reported a clear bookings number and outstanding backlog number.
Valuation/Pricing
My target price for CRNC is determined by several assumptions for both bullish and bearish scenarios of the FY 2024 projection, extending into FY 2025. In the bear scenario (with an 80% probability), it is assumed that CRNC will achieve an actual revenue of $250 million for FY 2024 (not misled number of $355m), with a further reduction in forecasted revenue to $200 million -$220 million for FY 2025. Utilizing the latest data and the Causal Intelligence Model, which considers various economic indicators and their intricate interrelations, the forecast for Cerence Inc. stock over the next 12 months, beginning with the current stock price of $9.62, is as follows.
The Bottom Line
In conclusion, I remain unconvinced about CRNC as a short-term or long-term potential investment.
Through my own journey, I’ve learned the importance of delving beyond surface presentations and digging into the underlying figures. Cerence’s recent announcement of their Large Language Model, a technology every OEM is pursuing either through partnership with Microsoft or by utilizing low-barrier tools like ChatGPT AI for assistant development, lacks a compelling narrative. The current leadership’s lack of experience in crafting winning propositions or securing new contracts has already diluted shareholder value and will continue to erode further, unless an activist steps in.
Moreover, the company’s challenges in monetizing its vision cast doubt on its capacity for sustainable growth and profitability. Consequently, I recommend investors approach this stock with caution and consider avoiding it altogether.