Cerence AI: One-Hit Wonder or Long-Term Winner After NVIDIA Pact?

January 16, 2025 at 11:06 AM EST

Cerence AI sound system

Shares of AI-assistant maker Cerence (NASDAQ: CRNC) exploded upward to kick off 2025 after the company announced an expanded partnership with NVIDIA (NASDAQ: NVDA). Shares rose nearly 144% in one day after the announcement. Since that one-day surge, shares have traded down approximately 31% as of the Jan. 15 close. So, what should investors make of this tech company with a market capitalization of under $600 million?

It notably competes with one of the most talked-about companies involved in AI-voice assistance, SoundHound AI (NASDAQ: SOUN). The value of SoundHound is around nine times that of Cerence, despite it generating less than half of Cerence's revenue last quarter. This signals there is a possible opportunity in Cerence stock. I’ll break down recent news surrounding Cerence and give my take on the merits of an investment in this company at this point.

Brief Overview of Cerence’s Business

Cerence builds AI voice assistants for the automotive industry, allowing for conversational communication with one’s vehicle. Cerence solely focuses on the vehicle market. This is a clear difference from SoundHound, which targets a plethora of markets, with automotive being just one of them. This difference in the size of their target markets has much to do with the difference in valuation between these firms.

Cerence’s voice assistant technology has strong penetration. The company estimates that over 500 million cars have its technology embedded. What’s more is that it estimates 52% of all new cars in the fiscal year ended Sept. 30, 2024, contain its technology. The company’s customers include many of the biggest car companies around the world. Leading players in the United States, China, Japan, and Europe make up its customer base.

The company’s last-12-month revenues and margins have recovered significantly from the lows they reached in Jun. 2023. These figures now sit slightly below the peaks they reached at the end of 2021. The company is currently profitable over the last 12 months on an adjusted basis. However, its revenue and profits swing significantly on a quarter-to-quarter basis. Last quarter saw negative profits and revenue growth of 32%.

Analyzing Recent News Surrounding Cerence

To get straight to the point, it doesn’t make much sense that Cerence shares skyrocketed 144% after its NVIDIA announcement. Don’t get me wrong, it is certainly positive for the company. The expanded collaboration with NVIDIA strengthens the company’s Cerence Automotive Large Language Model (CALLM) product. It helps the company maintain its spot as one of the leaders in the space.

However, when referring to the collaboration, the operative word is "expanded." The partnership is nothing new. Cerence has been working with NVIDIA since at least 2022. Specifically, on the CALLM product, the partnership with NVIDIA was first announced at the end of 2023. Thus, this rally was likely due to speculative fervor. It doesn't monumentally change the firm's fundamentals. For a small firm like Cerence, simply mentioning NVIDIA gets people extremely excited.

Gasoline was likely poured on the fire of this rally in the form of a short squeeze as well. The stock had high short interest on Jan. 3 of 17%. The initial rally likely caused short-covering, sending shares even higher. Notably, short interest remains at 17%, showing bears aren’t budging on their position.

To me, it would have been more logical to see Cerence rise significantly on an announcement it made just a day prior to the NVIDIA announcement. On Jan. 2, the company announced a deal to develop next-gen in-car experiences for Jaguar Land Rover. This means the company is actually gaining a new customer, representing a potentially long-term source of revenue. However, shares barely budged that day, up just 1%.

Final Thoughts and Outlook on Cerence

Overall, Cerence still has some significant proving to do. The company still needs to find a way to achieve consistent revenue growth over a long period. It will largely need to do this through its CALLM product, which represents a significant technological advancement. Continuing to monitor the adoption of the CALLM product going forward is key. It will also be important to see if the company can charge significantly more for the product due to its enhanced capabilities.

Hopefully, the company will release detailed initial data on the success of the product in its February earnings report. Cerence remains a name to watch as its next-gen AI-assistant solutions remain in their early stages of adoption. The success of its CALLM product could result in massive overall success for the stock over time.

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Cerence AI: One-Hit Wonder or Long-Term Winner After NVIDIA Pact?

Brief Overview of Cerence’s Business

Analyzing Recent News Surrounding Cerence

Final Thoughts and Outlook on Cerence

More News