Nice (NASDAQ:NICE) may not be a name you’re super familiar with but it’s a tech company that creates automation software for a wide range of business purposes.
Despite growing revenues and earnings, the valuation has tumbled to a significantly lower-than-average level, so is Nice an undervalued buy now, or has the market accurately repriced NICE shares to reflect the company’s long-term prospects?
Is Nice’s Valuation Fair?
Currently, shares of Nice trade at 24.5x earnings, 4.1x sales and 14.9x operating cash flow. Though these numbers might not make the stock look immediately undervalued, it’s important to take a bit of context into account.
Over the last 10 years, Nice has averaged a P/E ratio of 44.9x earnings. So, while Nice doesn’t trade at a discount to the broader market, it certainly is trading well below where the market has historically valued it.
Analysts still largely believe that Nice is trading a bit below its fair value. The consensus price target for NICE shares is $211 per share, up about 20% from the most recent price of $176. Of the 14 analysts who have rated the stock, 10 have issued buy ratings while 4 have issued hold ratings.
Nice’s Forward Growth Potential
For most businesses, a P/E of nearly 25 would hardly be considered a low valuation. What sets Nice apart, though, is the fact that it’s a high-growth tech business with a growing focus on AI.
The company makes a variety of automation software products ranging from AI copilots to customer insight tools. Nice is a leader in the CCaaS space and also offers software tools for financial compliance.
Nice is already generating decent growth as a result of its strong market position. In Q1, total revenues rose 6% to just over $700 million. Cloud revenue growth, however, came in at a much higher 12%.
Management also delivered very strong earnings and operating income growth rates of 26% and 22%, respectively. Cash from operations also saw a 12% increase to $285 million.
For the full year, Nice expects to generate revenue growth of 7% and earnings growth of 11%, both on a non-GAAP basis. While perhaps not the remarkably fast growth rates that other AI-focused companies are delivering at the moment, this seems to put Nice on track for solid, stable expansion of both its top and bottom lines.
Q1 was a long way from being a standalone quarter of growth in Nice’s performance history. The company’s earnings have been rising for 13 quarters, and its revenue growth streak has reached an impressive 39 quarters. Nice’s management has been able to execute well over several years, and the new technologies emerging today will likely create even more opportunities for the company going forward.
What Happens Next For Nice?
If we look a bit further down the road, it seems that Nice has at least the potential to keep this growth up for several years to come. One of the most interesting statistics in the Q1 earnings report was the expansion of AI and self-service revenue, which increased at a year-over-year rate of 39%.
This, of course, was dramatically higher than the overall revenue growth rate Nice reported and even higher than the growth rate from its cloud business. With AI tools still fairly young and the market for them still evolving, Nice has a chance to carve out a niche for itself as a go-to automation software provider.
Nice’s earnings per share are expected to grow at an annualized rate of around 11% through the next five years, likely supporting gradually higher share prices.
A final point of note about Nice is its expanding profitability. Trailing 12-month net margin has been marching slowly but steadily upward since early 2022 and now stands at 16.8%.
The leadership team also delivers respectable, albeit not incredible, returns on invested capital and equity of 11.7% and 13.2%, respectively. As Nice’s AI revenues continue to grow over the coming years, the company will likely be able to continue improving its profitability.
Institutional Investors Aren’t Buying Nice’s Value Proposition
One negative factor that investors looking at Nice should be aware of is the exodus of institutional investment capital from the stock in recent months.
On a trailing 6-month basis, institutional investors have sold $22.6 billion worth of NICE shares while buying only $8.3 billion.
Although institutional investors still own almost 75% of the company, this strong preference for selling in recent months may indicate a lack of confidence in the business.
Is Nice Undervalued?
Nice is undervalued according to the consensus estimate of the majority of analysts who place fair value 35.6% higher at $211 per share.
Nice is an interesting case in the AI world. While most AI companies are attempting to grow extremely quickly and fundamentally disrupt existing industries, Nice is already a successful SaaS business that is using AI to enhance its product offerings and deliver additional value. As a result, the company may not see the extremely high growth rates other AI companies are delivering. It may, however, come with less risk and a higher probability of delivering steady, sustainable growth over time.
At the moment, NICE shares may be moderately undervalued, though they likely aren’t trading at a gigantic discount to fair value. Even with modest undervaluation, though, the stock could be an attractive one for long-term investors looking for stable growth in AI. With earnings expected to keep growing at a solid pace over the next several years, Nice could be a decent buy-and-hold opportunity at a reasonable price.
Finally, it’s worth taking into account the effect that the company’s share buyback program could have on its stock price. In Q1 alone, the company deployed over $250 million to share repurchases and announced an additional buyback authorization of $500 million.
With management seemingly intent on buying back shares with the cash Nice generates from its business, long-term investors will likely continue to see their ownership stakes concentrated in the years to come. This, of course, could provide additional support for share prices and bolster investor returns over time.
The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.