NICE - NICE Ltd.: Seeking Value In The AI Sector

2023-08-16 12:35:09 ET

Summary

• NICE Ltd., a global enterprise software provider, is a leader in AI and has a strong presence in the cloud and AI sectors.
• The company's growth in the cloud/AI segments is expected to continue, and it may benefit from the broader AI and tech rally.
• NICE's stock price may be undervalued due to a false narrative about its pricing model, presenting a buying opportunity.

Introduction

NICE Ltd. ( NICE ) formerly NICE-Systems Ltd., is headquartered in Ra'anana, Israel. Meaning "fresh" or "anew" in Hebrew, this American-Jewish settlement was founded in 1922, and English is still widely spoken. As a former resident of Atlanta, Georgia, I know that Ra'anana holds a prized sister city relationship with Atlanta since 2001. The industrial zone north of the city is home to many high-tech companies, where NICE enjoys relationships with Microsoft ( MSFT ) and a dozen other tech notables. This gives the company a strong talent pool locally to draw upon, and opportunities to collaborate on idea flow in key areas of the cloud and artificial intelligence ("AI").

NICE is a leading global enterprise software provider that actually harnessed the commercial viability of chatbots well ahead of the recent rise of ChatGPT and other generative AI models. NICE truly is an AI pioneer and leader. Possibly, the company's focus as a B2B SaaS (Software as a Service) leader has made this mature technology company less of a household name. A number of the recently emerging generative AI products are retail-focused, which has brought companies like OpenAI to the forefront of media attention. NICE's segments include Customer Interactions Solutions, and Financial Crime and Compliance Solutions. From the company's website (emphasis added):

We are known for our innovation and comprehensive end-to-end CX approach, combining digital entry points , journey orchestration , smart self-service , prepared agents and complete performance suite , all embedded with our purpose-built CX Analytics, AI, and domain expertise .

With over 7,500+ NICE employees in over 30 countries, the company states that its team is comprised of, "scientists, engineers, business and thought leaders, people who boast extensive experience as subject-matter experts in their fields."

NICE is a global leader in personalized digital-first experiences with its CXone product that the company promotes as, "the world's leading cloud CX platform."

The Customer Interactions Solutions segment provides data driven insights that enable businesses to deliver personalized experience to customers. The Financial Crime and Compliance Solutions segment provides real-time and cross-channel fraud prevention, anti-money laundering, brokerage compliance and enterprise-wide case management. The Company serves contact centers, back office operations and retail branches, covering various industries, including communications, banking, insurance, healthcare, business processes outsourcing ((BPO)), government, utilities, travel and entertainment. Its Multi-Channel Recording and Interaction Management enables organizations to capture structured and unstructured customer interaction and transaction data from multiple channels.

A few of NICE's clients are represented in the graphic below:

Thesis

Consider that the tech market's leaders dubbed the Magnificent Seven are each up between 36% and 190% in 2023. Investors might anticipate a broadening out of this fairly narrow tech rally to include other tech industry leaders in AI and the cloud, which describes NICE's company sector category.

Strong growth in the cloud / AI segments of NICE's business model are likely to continue the existing trend from recent quarters for some time into the future. This is a long-term play on the continuing innovation that generative AI is bringing to innovative technology companies, such as NICE.

Listed on the Tel Aviv Stock Exchange since 1991, NICE ADRs have been listed in the U.S. on the NASDAQ since 1996. This stock may be undervalued in the market due to an incorrect narrative. The company is currently working to dispel the notion that its current seat-based pricing model for its SaaS AI technology suite of products could be disrupted by generative AI's usage-based pricing model.

The stock price of NICE recently approached 52-week lows on this false narrative, but has recovered somewhat to post a relatively tame 10% gain YTD in 2023. While other AI and tech stocks leading this market rally have risen sharply in value, NICE is actually down 7.45% from one year ago August of 2022. Therein lies the opportunity for this trade.

Strong growth in the cloud / AI segments of NICE's business model are likely to continue the existing trend from recent quarters for some time into the future. This is a long-term play on the continuing innovation that generative AI is bringing to innovative technology companies, such as NICE.

The recent false narrative regarding NICE may have provided an opportunity to achieve value in its stock price ahead of Q2 2023 earnings, combined with a longer-term broadening of the AI and tech rally. Importantly, the fundamental growth story for NICE may be accelerating as the signature benefits of increasing implementation of AI technology continue for the company. These benefits of AI characteristically are increased efficiencies, cost savings, enhanced CX, and revenue growth resulting from new product innovation.

Q2 2023 May Continue The Positive Trend Seen In Q1

The upcoming Q2 earnings report for NICE is set for pre-market on 8/17/23. NICE's recent Q1 2023 earnings call and also analyst day delivered a confident message that Israeli-based NICE is in fact well-positioned to continue capitalizing upon generative AI. NICE has a global leadership position in CX that applies AI technology for contact centers and other industries. AI is actually becoming disruptive within the very industries that have advanced AI technologies for years. This is evidence that innovation begets further innovation, and AI technology is demonstrating the efficacy of this time-honored concept more rapidly than any previous technology.

NICE is currently transitioning its pricing model to adapt to the change that AI tech continues to bring. My research concurs that NICE is on track to continue its growth in cloud-based revenues, while also capitalizing on generative AI growth. The reality of what is taking place on the ground as AI disrupts the SaaS industry is actually much more complicated and diverse than the simple narrative that is pervasive in the market.

Some of the leading, better capitalized companies like NICE are actually benefitting from the current disruption in their industry as smaller players lack the capitalization to adapt to change quickly. Also the narrative that AI is causing a deflationary number of seats in the marketplace that now seeks a usage-based pricing model for AI software services does not apply equally to all companies. When necessary, NICE is proving able to successfully transition from seat-based to usage-based pricing for its AI suite of products.

In fact, it is very possible that NICE may restructure its newer, usage-based pricing model to improve the company's top and bottom lines even further. This improvement to its pricing structure could actually contribute to an upside surprise in the coming quarters, albeit modestly I would think. The more significant upside catalyst that is not currently factored into the price of NICE's valuation may come from the continued implementation and innovation of AI technology in the company's model. The takeaway is that NICE's veteran leadership position in the AI CX space is likely improving, and may continue delivering strong results, with the potential for upside surprises.

Gartner's published Enterprise IT Software Reviews | Gartner Peer Insights recognizes NICE as an industry leader. Please note that the bulk of the more favorable 5-star reviews in the Gartner surveys have occurred recently in 2023. The less favorable 3-star reviews occurred as early as 2021. Possibly, NICE's CX suite of products have been improving along with the development of AI tech. Gartner's ratings give NICE a very favorable 4.4 stars. More recent ratings skew higher.

Summary

The current narrative of investors being concerned about the AI disruption of the SaaS industry's pricing model may be overdone in the individual case of industry leader NICE. CEO Barak Eilam, and CFO Beth Gaspich both communicated effectively during the Q1 call that the company is growing meaningfully in both the seat-based pricing side of the model, as well as the usage-based pricing side of the model. It turns out that as an industry leader, NICE is able to serve the marketplace in each of its various segments. This dynamic seems to allay the concerns of AI disruption for the NICE pricing model.

The primary leg of growth for NICE comes from its rapidly growing cloud business. The secondary leg of growth comes from AI in the NICE model. Management points to low levels of market penetration in both areas with the opportunity for much growth ahead. As AI technology continues to rapidly develop, it may be that the number of use cases will continue to increase in the marketplace. Also, the rate of corporate adoption for AI tech seems to be accelerating. These factors point to the potential for increasing growth of the AI business at NICE.

NICE is up only 10% this year in 2023, while four of the top-performing Artificial Intelligence ETFs shown in the figure below are each up about 30% YTD in 2023. I believe that this undervaluation relative to the AI sector's performance creates a compelling buying opportunity for NICE shares.

Trading off of 52-week lows recently, NICE may represent excellent value relative to the price performance of the AI sector. Recent concerns regarding the transition of NICE's pricing model for its AI suite of products may be overdone. In fact, there is a possibility that the current restructuring of NICE's pricing model may favor the company's fundamental growth and pricing model going forward.

Risks

Below are a few of the macro risks that exist for NICE:

Nice is in an industry that is undergoing disruption in the rapidly evolving AI sector. Competition is likely to arise from names with newer innovative technologies that do not exist yet, and may currently be private companies.

Regulation of AI technology is currently underway and may have an adverse impact upon the entire industry.

War in Ukraine has the potential to become a wider, global conflict. China's insistence upon invading the nation of Taiwan is a continued concern for the world. Much of the world's tech sector currently depends upon production from Taiwan, China, and the rest of Asia. War is a very real risk for the global economy.

Company-specific risks must consider execution in the implementation of new technology and the ability to successfully innovate in the future. NICE is currently a disruptor and a leader in its sector, both at once. The potential for a more innovative and newer disruptive technology to emerge as a competitor for NICE exists.

Conclusion

I am a long-term buyer of NICE Ltd ahead of its 8/17/23 Q2 2023 earnings report. This leader in CX analytics, AI, and domain expertise continues to deliver growth, innovation, and an expanding presence in the AI industry.

The macro for the AI tech revolution is very bullish. The old adage that a rising tide of capital inflows raises all ships may be relevant today. We may be in the early stages of a multi-year tech market driven by AI technology. AI may be analogous to the great white shark of all technologies swimming rapidly forward and preying upon weaker, legacy tech that has suddenly become obsolete.

NICE's traditional leadership role in AI is currently advancing along with the rapid progress of this long-term tech innovation cycle in artificial intelligence. This is very likely to be bullish for the future prospects of NICE. It appears that the future of this company may include long-term growth based upon the AI tech revolution, which is the catalyst for a multi-year bull market. This is a very compelling wave of optimism that exists for the outlook on NICE, Ltd.

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