Nice embraces cloud-based technology
When we invest globally, one thing we often look for are investment ideas that have a favourable long term thematic, at a point of change that can accelerate our investment view or the stock concerned is being misunderstood by the market.
One such example is Nice, an industry-leading Contact Centre as a Service (CCaaS) provider that delivers software solutions to help companies operate their customer support function across the full omnichannel experience. Customer support is a critical function for most businesses, particularly those consumer-facing businesses such as retail or banking. Despite the importance, customer contact centres are one of the slowest industries to invest in new technology, with approximately 80% of the industry still operating legacy on-premise software, and only 20% having migrated to the cloud.
There are clear benefits of migrating from on-premise to the cloud and, in time, we expect that close to 100% will make this transition. The most valuable reason to shift to the cloud is the ability to unlock tools that can improve the efficiency of call centre agents while also improving customer service levels. As customers increasingly engage with businesses online, it is important that a business can meet its customers across multiple channels including chat, email, social or phone. Tools, like chatbots, that can resolve or redirect customer queries more quickly and more accurately, can significantly improve outcomes. These, however, are only achievable when a contact centre is cloud enabled.
We have identified Nice Ltd, an Israel and US-listed business as a winner for this transition. Nice has been investing into its cloud-based platform CXOne since 2016, and has a market-leading offering that can modernise the full customer service journey. The competitive landscape is also improving significantly as legacy players which had the majority of the on-premise market, have failed to invest into next-generation cloud solutions and should lose market share as the industry shifts to the cloud.
Generative AI an accelerator of growth
The launch of ChatGPT, and more broadly generative AI, should accelerate cloud adoption and deliver sustainable revenue growth in the medium term. Chatbots can be enhanced into virtual agents that take advantage of natural language processing, to interact with customer queries more accurately. Other productivity tools include improved summarisation capabilities or live insight/data gathering for live agents. Ultimately cloud and GenAI help make agents more efficient and improve service levels, helping them reduce legacy cost base and enhance customer retention.
We view Nice as a generative AI winner. It is able to directly monetise its virtual agent and other productivity tools, delivering at least a 2x revenue uplift from customers using its cloud solution and adding additional digital tools. The uniqueness of the opportunity is that customers also achieve a high return on their additional investment with Nice. In addition, the development of AI should increase the speed of cloud migration as customers try to unlock these efficiencies in their contact centre operations, accelerating Nice’s market share and earnings potential.
Since we made our initial investment in March 2023, the Nice share price has been volatile, driven by the uncertainty that AI has on the future of contact centres. In mid-April 2023, shares sold off 20% as the market perceived AI as a potential risk. Our detailed research along, with Milford’s timely research trip to the US to meet five different industry players, grew our conviction to retain our differentiated view that generative AI was likely a positive for Nice as it expanded its revenue potential, and accelerated the cloud migration trend. This allowed us to use the volatility to build a larger position before the share quickly recovered through June.
Nice represents a unique long term investment opportunity, with strong secular tailwinds while trading on an undemanding valuation. We are positive on the 20% guided cloud growth and are well positioned to monetise the evolution of generative AI.
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