How Cerence is Defining a New Era for In-Car Voice AI

Key Takeaways:

• Cerence, a leader in in-car voice AI, is advancing personalized driving experiences through generative AI and strategic partnerships, like its collaboration with NVIDIA.
• Despite market challenges, Cerence’s stock is undervalued, with a $33.8 target price suggesting a doubling upside potential, fueled by generative AI adoption and its strong position in premium automotive markets.

Imagine this scenario: You’re sitting in your car after a long, busy day at work, and your in-car voice assistant gently asks, “Would you like me to play some relaxing music for you?” It then reminds you of tomorrow’s meeting based on your schedule and suggests the nearest charging station where you can grab dinner. This isn’t science fiction, it’s the driving experience Cerence is creating for us.

As a global leader in in-car voice AI, Cerence not only serves top automotive brands like BMW, Mercedes-Benz, and Audi but is also paving the way for the future of intelligent driving through its deep collaboration with NVIDIA, integrating generative AI technology into the automotive environment. Today, let’s talk about Cerence, the industry leader, and how it maintains its leading position in the increasingly competitive in-car voice AI market through technology, partnerships, and innovation.

Source: Tradingview

Cerence’s Unique Edge: From Voice Assistant to Driving Companion

Technological Expertise and Deep Industry Engagement

Cerence was born out of a spin-off from Nuance Communications in 2019, inheriting its technological foundation from Nuance, a pioneer in natural language processing. With over 20 years of experience in in-car voice AI, Cerence’s technology is now embedded in 52% of global car production, a testament to its industry penetration.

Cerence’s voice assistant supports over 70 languages and dialects and can accurately recognize speech even in noisy car environments. This technical capability has secured its strong position in both traditional automotive and electric vehicle (EV) markets.

Deep Integration and Multi-Scenario Applications

Cerence’s products are centered around driving scenarios, emphasizing deep customization and contextual awareness. For example:

• Cerence Co-Pilot: This proactive AI assistant predicts driver needs and offers suggestions, such as reminding drivers to slow down in bad weather or recommending charging stations based on the destination.
• Cerence Just Talk: Allows activation of the voice assistant without a wake word, making human-machine interaction more natural.
• Cerence Look: Combines eye-tracking technology with voice interaction, enabling drivers to execute commands simply by glancing at the screen.

These technologies not only provide a more personalized experience for drivers but also make Cerence the preferred partner for premium automotive brands like BMW and Mercedes-Benz.

Cerence and NVIDIA: Defining the Future of In-Car Voice AI

If Cerence’s technology is the soul of in-car voice AI, its collaboration with NVIDIA has infused it with powerful computing capabilities and innovation. In 2023, Cerence announced a deepened partnership with NVIDIA, though the market remained skeptical about its practical impact, and the stock price showed little reaction. However, in January 2025, Cerence released specific details of the collaboration, announcing plans to jointly develop a high-performance in-car AI platform with NVIDIA, optimizing its language models and focusing on generative AI. This news demonstrated the tangible progress and potential benefits of the partnership, becoming a key catalyst for the stock’s surge. It could also face challenges acquiring sufficient quantities of high performance chips from NVIDIA because of supply constraints due to high demand.

Powerful Technological Empowerment

1. Accelerating Generative AI Development
   Cerence is driving the application of generative AI technology, with its CaLLM (Cloud Language Model) and CaLLM Edge (Edge Computing Language Model) at the core of its products. With NVIDIA’s support, Cerence’s generative AI not only operates more efficiently but can also handle complex voice interactions locally within the car.
2. • NVIDIA’s DRIVE platform provides high-performance computing power, enabling Cerence’s voice assistant to respond to driver requests in milliseconds.
   • The NeMo framework helps optimize Cerence’s generative AI models, improving the accuracy and security of natural language processing.
2. Balancing Privacy and Real-Time Performance
   In the automotive environment, data privacy and real-time performance are critical. Leveraging NVIDIA’s edge computing capabilities, Cerence enables localized data processing, ensuring driver privacy while maintaining smooth operation even in poor network conditions.
3. The Future of Multi-Modal Interaction
   NVIDIA’s Omniverse tools allow Cerence’s voice assistant to go beyond voice, integrating visual and gesture inputs for multi-modal interaction. For example, drivers can control air conditioning, music playback, and navigation settings through voice commands and eye movements.

Enhanced Commercial Value

• Expanding Market Reach: Through NVIDIA’s DRIVE platform, Cerence’s technology can reach more automakers, especially those pursuing high-performance computing and intelligent cockpit experiences.
• Faster Time-to-Market: NVIDIA’s hardware and software support helps Cerence develop and deploy AI models more quickly and efficiently, shortening the product development cycle.

Cerence’s Strategy in the Generative AI Era

Generative AI is a hot topic in the tech world, and Cerence is applying this technology to in-car voice assistants to enhance interaction and personalization. Here are the breakthroughs in its core products:

1. Cerence Chat Pro
   Cerence’s generative AI voice assistant supports complex conversations and dynamic problem-solving. For example, drivers can ask, “Is parking convenient at the restaurant I’m going to tonight?” The system will combine navigation and parking data to provide detailed suggestions.
2. Cerence Co-Pilot
   This product uses generative AI to offer personalized driving advice. For instance, when driving on a long route, the assistant might suggest, “There’s a scenic rest area 50 kilometers ahead. Would you like to stop and relax?”
3. Cerence AI Studio
   A generative AI development tool provided by Cerence for automakers, enabling personalized customization of brand voice assistants. This not only enhances the brand experience for car manufacturers but also opens new revenue streams for Cerence.

Cerence vs. SoundHound: Who Will Win the Future of In-Car Voice AI?

While Cerence dominates the in-car voice AI market, SoundHound’s rapid rise cannot be ignored. The two companies have distinct characteristics in terms of technology, market strategy, and growth potential:

Although SoundHound is growing faster, Cerence’s technological expertise and long-standing customer relationships in the automotive industry give it an edge. To maintain its lead, Cerence must continue to innovate and explore markets beyond automotive. 

Cerence’s Financial Performance and Market Potential

Current Performance

• Revenue for FY2024 was $331 million, up 12.6% YoY, driven by new product launches and the commercialization of generative AI.
• Gross margin remained stable at 73.7%, reflecting the profitability of its premium products.
• However, its revenue remains heavily reliant on the automotive industry, which could pose long-term challenges as the industry slows.

Cerence’s Revenue Structure and Trends: Challenges and Opportunities

Cerence’s revenue comes from three main sources: licensing, connected service, and professional service. Here’s the breakdown for FY2024:

1. Licensing: Traditional Strength Under Pressure
2. • Revenue from licensing is generated by selling software licenses to automotive manufacturers and Tier 1 suppliers, enabling them to incorporate Cerence's AI-powered solutions, including voice recognition and conversational AI, into their vehicles. These manufacturers are charged licensing fees either per vehicle or according to the scale of deployment.
   • YoY Change: Q4 licensing revenue fell by 41.2%, with a 14.1% decline for the full year.
   • Possible Reasons:
   • • The demand for traditional voice assistant licensing is approaching saturation, and some contracts have not been renewed.
     • Increased competition and a trend toward in-house voice assistant development by clients.
2. Connected Service: Growth Engine for Connected Cars and Edge Computing
3. • Connected services create revenue through subscription or usage-based models, powered by cloud-driven features that are regularly updated and supported by Cerence’s servers or external cloud systems. Automotive manufacturers or drivers are charged for continuous access to features like live traffic updates, improvements to voice assistants, and connectivity with third-party services such as music streaming platforms or navigation tools.
   • YoY Change: Full-year growth of 77.8%, but Q4 revenue fell by 36.9%.
   • Possible Reasons:
   • • Quarterly decline due to customer procurement cycles or delayed orders.
3. Professional Services: A Pillar of Steady Growth
4. • Automakers often require tailored solutions to integrate Cerence's technology into their vehicles. Cerence charges for these customized services, which include adapting software to meet brand-specific needs (e.g., voice assistant personality, language support), integrating Cerence AI with in-car hardware or third-party systems, and providing consulting and technical support during development.
   • YoY Change: Q4 down 6.0%, full year down 1.3%.
   • Possible Reasons: Supported by high-end customization demand, with minimal fluctuations.

Three Key Metrics Revealing Growth Pressure

Source: Company Financials, Tradingkey.com

From the downward trend in the three key metrics, it can be observed that:

1. Strong Industry Position, But Market Penetration Nearing Saturation
2. • Cerence’s technology is embedded in 52% of global car production, showcasing its leadership. However, penetration rates have slightly declined, indicating saturation in traditional markets. Future growth depends on EV clients and emerging markets.
2. Healthy Growth with Potential Slowdown Risks
3. • While car shipments with Cerence technology grew 16% YoY, the growth rate has slowed compared to previous quarters, reflecting macroeconomic and automotive industry cyclical pressures.
3. Revenue Growth Challenges
4. • Total billings grew only 1%, significantly lower than connected car shipment growth. This highlights challenges in revenue growth and profitability, especially amid budget cuts, increased competition, and rising low-margin product sales.

Cerence’s FY2025 Revenue Guidance and Growth Expectations

Cerence’s FY2025 revenue guidance is $236M - $247M, with a midpoint of $241.5M. Compared to FY2024’s $331.5M, this indicates a significant decline. However, excluding the one-time $86.6M Toyota “Legacy” contract, the actual YoY decline is only 1.39%, showing stable core business performance.

Core Reasons for Growth Pressure：

1. Decline in Fixed Contract Revenue: FY2025 fixed contract revenue is expected to be only $20M, significantly lower than previous periods.
2. Industry Demand Fluctuations: The global automotive industry is undergoing cyclical adjustments. GlobalData predicts only 1% growth in global light vehicle production in 2024, indicating ongoing sales pressure for traditional automakers, Cerence’s primary clients. As shown below chart, traditional car sales have been declining in recent years.
3. Increased Competition: Rising competition from new players like SoundHound, coupled with EV brands developing in-house voice platforms, poses a threat to Cerence’s market share. For example, Tesla has made impressive strides in developing its in-house voice AI, leveraging its vertically integrated approach, OTA updates, and fleet data. While Tesla has advanced in functionality and integration, its voice AI still lags behind Cerence in terms of maturity, multilingual support, and cloud-hybrid capabilities.

Source: International Energy Agency

Future Outlook

• Generative AI Product Rollout: Cerence’s six generative AI products launched in FY2024 are expected to contribute significantly to future revenue.
• EV and Smart Driving Opportunities: As the EV market grows, demand for intelligent cockpits will rise. Cerence is already deeply integrated with premium EV brands like Mercedes EQ and BMW i-series, providing customized voice assistants.

Valuation Analysis: What’s the Potential for Cerence’s Stock Price?

Comparable Company Analysis

Selected companies are comparable due to their similar technological and industry positioning: SoundHound, C3.ai, and Veritone focus on AI technologies (voice recognition, NLP, or machine learning), aligning with Cerence’s core. Aptiv and Mobileye serve the automotive industry, focusing on smart driving, connected cars, or automotive AI, matching Cerence’s customer base and industry characteristics.

The price-to-sales (P/S) ratio is suitable for revenue-driven companies, especially growth or pre-profit firms, as it measures the market’s willingness to pay per unit of revenue. For AI and tech companies like Cerence and its peers, P/S reflects market expectations for future growth, industry prospects, and technological value. Here’s their P/S and revenue growth:

Target Valuation: Adjusted for Industry Outliers

SoundHound’s P/S is significantly higher due to its near 100% revenue growth, far exceeding peers. This high growth rate suggests the potential for substantial future revenue expansion, justifying the market's willingness to assign a higher P/S ratio. However, since Cerence's revenue growth is negative, the gap between Cerence and SoundHound is too large. Therefore, when calculating the average P/S ratio, SoundHound is excluded. Excluding SoundHound, the industry average P/S is 5.88. Based on this, Cerence’s target valuation is:

• Target Market Cap: 5.88 × $241.5M = $1.42B
• Target Stock Price: $1.42B ÷ 42M = $33.8

Investment Potential

• Undervalued stock: Target price of $33.8 implies 65% upside potential.
• More Upside Potential: If actual revenue growth exceeds management guidance, the stock could rise further.

Conclusion

As a leader in in-car voice AI, Cerence is carving out new growth paths in the generative AI era through its deep technological expertise and collaboration with NVIDIA. However, slowing revenue growth and intensifying competition remain key challenges.

From a valuation perspective, the current stock price is conservative, with a target price of $33.8 indicating significant potential. If Cerence can exceed revenue guidance and expand its market reach, its future performance is worth watching.