On Wednesday, Needham analysts revised their stance on Cerence Inc . (NASDAQ:CRNC), moving from a neutral Hold to a positive Buy rating, and established a new price target of $16.00. The stock, currently trading at $13.66, has shown remarkable momentum with a 332% surge over the past six months, according to InvestingPro data.
The upgrade comes with expectations that next-generation, large language model (LLM)-based voice assistants will contribute to an increase in Price per Unit (PPU), a metric significant for the automotive industry as manufacturers seek to balance cost cutting with maintaining a premium brand image.
The analysts' decision is grounded in several key factors including Cerence's strong leadership, effective debt management strategies, and improved cash flow projections influenced by Deferred Revenue dynamics. The company maintains a healthy gross profit margin of 73.7% and shows promising financial metrics despite current profitability challenges.
Confidence in the company's ability to raise PPU, a forecasted normalization of fixed contract balances by December 2026, and conservative near-term operating expense estimates also contribute to the positive outlook.
Needham highlights the company's attractive valuation as another reason for the upgrade. The new price target of $16 is based on a 16 times multiple of their fiscal year 2027 EBITDA estimate, which stands at $52 million. This aligns with InvestingPro's Fair Value analysis, which suggests the stock is currently undervalued. Get access to detailed valuation metrics and 8 additional ProTips with an InvestingPro subscription. This valuation reflects the analysts' belief in the company's future financial performance.
While the upgrade is not directly tied to Cerence's recent extension of its partnership with NVIDIA (NASDAQ:NVDA), analysts believe that the collaboration could bolster Cerence's software capabilities in the near term. With analysts projecting a return to profitability this year, investors can access comprehensive analysis and forecasts through InvestingPro's detailed Research Report, available for over 1,400 US stocks.
In the longer term, it could pave the way for a unique market approach with edge LLMs, potentially strengthening Cerence's position in the market for voice assistant technologies within the automotive sector.
In other recent news, Cerence Inc. has been making notable strides in the automotive AI sector. In a recent development, Cerence has expanded its partnership with NVIDIA to enhance its language models used in vehicles, aiming to optimize the performance of its in-vehicle assistant. In a different move, Cerence has entered into a multi-year agreement with Jaguar Land Rover to develop the next generation of in-vehicle experiences.
These recent developments also include the appointment of Antonio Rodriquez as the new Chief Financial Officer, a move expected to drive growth and improve operating results. Cerence's financial performance revealed a revenue of $331.5 million in the last twelve months with a robust 73.7% gross margin. Analysts from Craig-Hallum maintained a Hold rating on Cerence's stock, raising the price target to $6.00.
Moreover, Cerence has announced a strategic shift towards generative Artificial Intelligence with a goal of returning to profitability by fiscal year 2025. The company reported Q4 revenue of $54.8 million, surpassing guidance, and an adjusted EBITDA of negative $1.9 million, which was better than anticipated. Cerence has also guided for $25 million in free cash flow for the fiscal year 2025, with a projection of $34 million when excluding one-time items.
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