In recent years, cars have become more integrated with the world, with advanced technology providing live navigation, alongside dashboards that connect with our phones.

Cars now allow us to listen to podcasts, take phone calls, read out text messages, find gas stations along our route, and much more.

Meanwhile, all of these additive distractions must be managed to be safe for the driver and others on the road. This means having a solution onboard that can handle all these things is essential.

That’s where Cerence (CRNC) comes into play.

Cerence is the software company behind the technology that helps cars with tasks like navigation, hands-free communication, and early autonomous vehicle (AV) technology.

The company designs AI-powered virtual assistants that simplify all the technology in cars that is needed today.

With partnerships spanning major automakers like BMW, Mercedes-Benz, Toyota, and Volkswagen, Cerence’s technology is already embedded in millions of vehicles worldwide.

As cars evolve into “computers on wheels,” the company’s role is becoming increasingly critical.

At its core, Cerence solves a simple but essential problem by reducing distractions while driving. Instead of fumbling with buttons or screens, drivers can adjust temperature settings, navigate routes, or play music using voice commands.

The company’s technology goes beyond basic voice recognition with CaLLM (Cerence Automotive Large Language Model) enabling cars to understand natural speech, answer questions, and even anticipate driver needs.

For example, a driver could ask, “I’m cold” and the system doesn’t just crank up the heat, it remembers your preferred temperature settings

Cerence’s software is already deployed in most of the newer vehicles today, and its partnerships with automakers ensure its solutions are tailored to specific brands.

Land Rover, for instance, recently signed a multi-year deal with Cerence to develop next-generation voice assistants for its luxury vehicles.

Similarly, collaborations with companies like Nvidia have enabled Cerence to integrate powerful AI capabilities directly into car systems, allowing for faster processing and more responsive interactions without relying solely on cloud-based solutions.

By processing data on the vehicle’s own hardware, Cerence reduces the need for expensive cloud infrastructure while ensuring systems work even in areas with poor connectivity.

For drivers, this means quicker responses and greater privacy, as sensitive data stays within the car.

This strategy also creates long-term value for Cerence. As automakers roll out more advanced in-car systems, the company’s software becomes a recurring revenue stream. Every new feature or update adds to the value proposition.

Despite these in demand features, the market is worried about automakers and overall consumer health.

We can see what the market thinks through our Embedded Expectations Analysis (“EEA”) framework.

The EEA starts by looking at a company’s current stock price. From there, we can calculate what the market expects from the company’s future cash flows. We then compare that with our own cash-flow projections.

In short, it tells us how well a company has to perform in the future to be worth what the market is paying for it today.

At the current stock price, the market predicts that the company’s Uniform return on assets ”ROA” declined to 6% from 17% last year.

Like many in the automotive sector, Cerence has faced challenges with delayed vehicle production cycles and shifting consumer demand.

However, the company is taking proactive steps to streamline operations. A restructuring plan, aimed at reducing costs by $40 million annually, focuses on optimizing its workforce and prioritizing high-impact projects.

These changes are designed to strengthen Cerence’s profitability as the auto industry rebounds.

The real opportunity lies in the increasing demand for AI-driven features. Drivers now expect their cars to offer the same level of connectivity and convenience as their smartphones.

Cerence’s ability to deliver these experiences through partnerships, embedded AI, and a deep understanding of automotive needs gives it a unique edge.

As vehicle production stabilizes and automakers accelerate their push toward software-defined vehicles, Cerence is well-positioned to scale its solutions and benefit from the demand.

Best regards,

Joel Litman & Rob Spivey
Chief Investment Officer &
Director of Research
at Valens Research

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