NICE - NICE Ltd.: Profitable Technology Firm With A Track Record Of Commercializing AI

Summary

• NICE provides AI-enabled customer experience software.
• The firm has a track record of commercializing chatbot technology long before the current hype cycle.
• Along with this, it has put up a decade of positive cash flows and has continued to grow revenues.
• While not particularly cheap on a valuation basis, I like how this stock provides exposure to these technologies within the context of a relatively large and stable entity.

Overview

NICE Ltd. ( NICE ) is a customer experience ((CX)) software-as-a-service company. They provide a broad range of offerings for enabling the customer experience and sales functions within a business, along with several other capabilities such as business intelligence and reporting. At the core of their technology is an artificial intelligence agent called EnlightenAI. According to the company, this allows each of their services to adapt to customer experience and adjust its algorithms the more its utilized.

What makes this company interesting off the bat is that they have successfully commercialized ‘chatbots’ long before the current media frenzy around ChatGPT. The use case here is customer service. When a customer has an issue, NICE technology allows them to solve their problem in an automated fashion by having a chatbot respond to their inquiries as well as route them to a customer service professional if necessary. This capability is referred to as a ‘contact center as a service’, and NICE has long been an innovator and leader in the space.

We can readily corroborate this by looking at the Gartner ‘magic quadrant’ for this capability, where inContact – the company’s call center automation technology – sits handily at the top right. InContact was previously its own entity that was acquired by NICE in 2014.

Along with the rest of their offering, we can begin to see that NICE provides a full suite of capabilities for automated customer experience. This is built out to the point that customers that have yet to purchase or have already purchased can interface with the technology. By leveraging artificial intelligence to both drive sales as well as provide customer service, NICE provides what can be considered both revenue-driving and cost-saving software. I consider this a robust B2B offering as SaaS companies generally focus on one or the other.

Having looked at what the firm actually provides, we should also make note of their customer base. A quick peek at their website shows us that a variety of well-known enterprises are currently customers. This can certainly be considered a mature technology company, and we will review its financials in light of that.

Financials

Starting with revenues, we see that NICE has kept up a relatively brisk pace of growth even as its grown to be quite large. While there is some volatility in these figures, we can see that the latest full year report saw a return to double-digit growth for the firm. We will be seeing numbers for fiscal year 2022 later this week, but the company has already crossed the $2B yearly run rate mark for 2022.

NICE being a mature technology entity, we can confirm that it is consistently profitable – with fiscal year 2022 showing profits approaching record levels. The full year report should see the firm set a new record for yearly profits, as it has already generated 95% of peak profits during the first 3 quarters of 2022.

This uptick in profitability is also occurring along with robust cash flows. While the firm did show a significant downtick in free cash flows in 2021, it appears that this cash was allocated to working capital at that time and should not raise eyebrows. The picture here is of a consistently cash-generative entity, without exception over the last decade.

These financials look good to me and are representative of what a quality SaaS firm should be putting up at this point in its lifecycle. With that being said, NICE stock is not particularly cheap relative to its information technology peers. It is currently trading at a significant premium on both a sales (124%) and cash flow (63%) basis vis-à-vis the information technology GICS sector.

Looking into price performance, we see that NICE stock was subject to the technology sector sell-off of 2022 while still continuing to trade at a premium to its peers. To date since inception, it has outperformed the NASDAQ Composite roughly 4-to-1.

This puts the firm at an interesting inflection point at present. The stock certainly isn’t cheap and is clearly correlated with the broader technology sector. Yet, its fundamentals are still quality and are showing us an uptick in its growth rate across revenues and net income – along with ongoing consistency as to cash flows. I would call this a value stock on this basis, but it's made more interesting as it has recently posted a year of double digit revenue growth – not something you see with too many companies past the $1B yearly revenue mark. Additionally, the next earnings report will almost certainly add up to a record year for NICE. This could drive further appreciation along with the overall tech sector rebound that we’re seeing in 2023.

Conclusion

With the caveats around valuation, I am still going to call this one a buy. Its consistent cash generation and increasing growth rate show that this stock has both the capacity to sustain itself as well as grow further. Additionally, the core competencies that the firm has proven within chatbots and artificial intelligence make it well-positioned to commercialize these technologies – something which the largest tech companies are now scrambling to do. Thus, this firm provides an investor with exposure to these technologies in a readily-commercialized form, all within the context of a mature and profitable technology entity.

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