September 23, 2021

Cerence: This Legacy Auto Supplier Belongs In The SaaS Trash Junkyard – Behind The Idea (NASDAQ:CRNC)

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Seeking Alpha: Can you briefly summarize your bearish thesis for readers who may not have seen it yet?

The Friendly Bear: Cerence is just a boring automobile OE supplier that has temporarily benefited from investor excitement over terms such as AI and SaaS. In my view, there is little substance to the hype story. Cerence used to have dominant market position, but there is nothing that differentiates its technology today and it is facing up against large technology companies that have R&D budgets larger than Cerence’s entire market cap. These large technology companies are focused on getting into cars, homes, your phone, your entire life. There is added pressure for Cerence because even new startups on the white label side such as Soundhound are coming out with innovative products. So Cerence is going from having dominant share of automobile voice recognition applications to a major share donor. The company plays down this share loss dynamic – but just look at what has happened with Mercedes – a prior material customer of Cerence’s that has now entered a major strategic and economic partnership with Soundhound – and it is easy to see that Cerence is on the wrong side of history.

Two things. First, the company is aggressive with press releases. I’ve seen this before in a prior short – TrueCar – the company put out incessant press releases touting minor developments. That stock eventually collapsed.

In the past few days, Cerence has put out at least two fluffy announcements about niche electric car contracts that appear to be economically largely irrelevant. But these announcements hit on buzz words that the market loves – EVs and AI. These types of announcements get a certain group of investors excited. That is part of what I think drove the crazy surge in the shares this year.

The second dynamic is that value investors are desperate to prove that their craft is not dead – in a world of anemic economic growth, when value investors find any company that optically looks cheap and is showing some signs of growth, they pile in and get to enjoy the growth investor high life for a while. Being a growth investor is a lot more fun these days because your stocks go up every day without any effort. You see this dynamic often in recently spun off companies – where investors extrapolate trends or dream up dreams and start to think they actually own something transformational and growth oriented – then find out in one single bad quarter that they actually owned a pretty lousy business. The reality most of the time is that value investors who think they found hidden gems are self-deluding.

SA: Why do you think investors are ignoring such an obvious comp to Telenav (which argues for significant downside)? Is it because they are thinking CRNC is a certain type of company when it’s really another type?

The Friendly Bear: People want to believe that maps are something Google is unusually strong with hence the collapse of Telenav shares, but that voice is something Cerence is uniquely positioned to deliver. But when you think about how much money Google, Apple, and Amazon spend on their voice assistants in smart phones and personal assistants, and then you consider that they are all going after the car, it is hard to fathom that they will not win – at least on the technology front. These companies are incredibly focused on R&D tied to voice assistance and AI. Also, it’s a big selling point for OEs to say they include Alexa or Siri in the cars. They even include these factoids in their car commercials. As a white label provider, Cerence goes up against that dynamic. Yes, luxury brands may want white label solutions because they want to own the customer experience – but it is clear Soundhound has made huge inroads on that side of the business (through Mercedes at the very least). So Cerence is facing juggernaut threat in the mass market auto space, and on the white label side is facing at least Soundhound. I think Cerence has just been better at marketing its story than Telenav – talking up AI and SaaS is more believable with Cerence than with Telenav.

SA: You made an interesting point that CRNC’s pre-spin parent company did not pursue a strategic/PE exit – can you unpack this a bit and what it means for CRNC’s value, as often there is as much information from what a company does not do, as what it does?

The Friendly Bear: We understand that Nuance shopped Cerence to strategics and private equity. None of them appeared to want it at a market cap of under $1 billion. Now Cerence sports a $2 billion market cap. That should concern any bull on this name.

SA: You cite a number of material headwinds facing CRNC – can you provide a timeline of specific events to be on the lookout for?

The Friendly Bear: Whether you are long or short this stock, it’s worth staying on top of every announcement of Google, Apple, Amazon, and Soundhound getting into cars in any way shape or form. After the article published, Amazon announced a Ring partnership with Tesla. Sure this did not hit Cerence directly, but it tells you that Amazon cares about being in the car. The more that these large technology companies penetrate cars, the worse the long term outlook is for Cerence.

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Thanks to The Friendly Bear for the interview.

Disclosure: I am/we are short CRNC. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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