NICE Ltd

Nice's second quarter beat FactSet consensus while 2026 EPS guidance was raised modestly. Cloud growth was 12.6%, cloud backlog growth was 19%, and artificial intelligence backlog growth was 72%. Shares were down 6% intraday on Aug. 5.

Why it matters: Backlog conversion remains a concern. Backlog growth is strong but decelerated from the first quarter and is not yet visible in cloud growth. This will continue in the third quarter as cloud growth is expected to remain stable. Nice asserts the lag between bookings and revenue is due to winning larger enterprise deals where many customers remain in the early stages of deployment. Nice maintained 2026 cloud growth guidance (13%-15%) but this seems dependent on non-customer engagement customers converting to the cloud. Given on-premises product revenue growth has been surprisingly strong in the first half, we think 2026 cloud growth will be 13%.

The bottom line: We maintain our $170 fair value estimate for no-moat Nice. Shares look undervalued. After years of decelerating cloud growth and fears around AI-disruption, the market remains cautious on forecasting a turnaround. We are more optimistic given Nice's leading position in the Contact-Center-as-a-Service market and enhanced platform offer with the addition of Cognigy. Our estimates are below consensus, yet our fair value estimate is well above the stock price and consensus target price. The market continues to price Nice at a very high risk of being fully disrupted by AI. The shares will likely continue to tread water until we see a material uptick in cloud growth.

Coming up: 2026 guidance is for revenue of $3.17 billion-$3.19 billion (8% growth) and EPS of $11.06-$11.26 (previously $10.98-$11.18). Third-quarter guidance is for revenue of $780 million-$790 million (7.2% growth) and EPS of $2.73-$2.83. 2026 cloud growth is expected to be 13%-15%. Third quarter is expected to be similar to the second quarter (12.6%).

Our fair value estimate is $170, which implies a 2026 P/E multiple of 16 times.

We expect total revenue to grow at about a 10% compound annual growth rate over the next five years, as high growth in the cloud business is somewhat offset by declining service and product revenue. Cloud and total revenue growth should be primarily driven by Nice's CXone CCaaS platform, which will include the recently acquired Cognigy, an artificial intelligence company. Service and product revenue reflect the dwindling on-premises software business, which we expect to continue shrinking in line with Nice's strategy of focusing on cloud offerings.

We think cloud revenue growth will accelerate from the low teens in 2025 to the midteens for the subsequent five to six years as Nice capitalizes on the fast-growing CCaaS and conversational/agentic AI-driven customer engagement markets. CCaaS market growth is shifting from the SMB market to large enterprises. We think CXone is ideally positioned to win market share in the nascent large enterprises market, given its leading position and ability to continually invest in research and development. In contrast, several competitors are either struggling financially or unable to deliver a CCaaS solution that is suitable for the enterprise market. The large enterprise market also has more potential for upselling, as enterprises tend to take multiple solutions given their more complex needs. Additionally, we think Nice's CCaaS revenue growth will be further supported by international expansion and conversion of its legacy on-premises workforce engagement management customers to CCaaS, which tends to boost the annual contract value by 2-10 times. The AI-driven market is expected to grow rapidly in the coming years. With the acquisition of Cognigy, Nice is now the leading player. We expect growth to be driven by high market growth and cross-selling to Nice's CCaaS installed base.

We expect non-GAAP operating margin to fall to around 25% in 2026, rising to around 26% by 2030. Nice should benefit from scale benefits in the cloud business with continued growth, but we expect operating leverage to be weighed down by continued investments needed to capture growth opportunities in AI and international markets.

We do not believe that Nice has an economic moat. While we think the company currently benefits from switching costs in both of its segments, customer engagement and financial crime and compliance, we are not confident that these switching costs will endure over a long time horizon due to potential disruption by artificial intelligence, particularly in customer engagement. Historically, Nice’s returns on invested capital have averaged around 11%, a modest premium to its cost of capital. We expect a similar level to be maintained in our explicit forecast as benefits from increasing scale are largely offset by increasing AI-driven investment.

Customer engagement is by far the larger business segment, accounting for around 85% of the company's revenue. This segment offers cloud-based and on-premises software for contact centers to optimize customer service and manage customer service agents. Nice’s main offering is CXone, its unified cloud-native CCaaS platform that combines guided customer journey orchestration (routing) for voice and digital channels (websites, email, chat, mobile apps, for example), interactive voice response, chatbots, artificial intelligence, agent assistance tools, analytics, and workforce engagement management, among others. Industry analyst Gartner considers Nice’s CXone a leader in the industry along with Genesys’ Cloud CX.

We think the CCaaS market is relatively fragmented. Nice is the largest player with around 15% market share. Genesys is a close second (13%-14% share) and Five9 is the third-largest player with around 8%-9% share. Beyond the top three firms, which control around 35%-40% of the market, other notable competitors include Amazon, Cisco, and Talkdesk. In total, we believe around 50 companies operate in the global CCaaS market.

We think switching costs are primarily driven by the mission-critical nature of customer service for businesses. Companies rarely reduce spending in this area, even during cyclical downturns, and are very hesitant to disrupt business processes around the contact center, given the tangible risk of customer loss from unsatisfactory service. Indeed, contact center software is frequently cited as one of the top five priorities in defensive IT budgets.

Nice can deploy its CXone solution quickly, in as little as 24 hours in some cases. However, because of the complexities of implementation on the customer side, it can take several weeks for small and midsize businesses and many months for large enterprises to get up and running. We think most of Nice's CXone customers are currently SMBs, but the market is now shifting to large enterprises. Large enterprises will typically need system integrators to help with implementation, which extends the implementation timeline. Furthermore, the complexity of going live often means a staged approach is utilized. Large enterprises will often adopt CXone for one division or one side of the business and then expand. We think the long go-live timelines and general client caution in the software implementation phase are good indicators that customer service is a mission-critical function.

Switching costs are also enhanced by CXone's multiple touchpoints within its customers' operations. Integration with other third-party software is common, such as CRM, which further entrenches the platform into a company’s workflows. Nice asserts that the typical uplift in annual contract value from conversion to the cloud from on-premises is 2-3 times and sometimes up to 10 times. We think the sheer increase in ACV upon conversion to the cloud is good evidence of CXone’s increasing touchpoints within its customers’ operations. However, despite this increasing spending on CCaaS platforms like CXone, we still think these platforms are a moderate cost compared with a customer’s total expenses, which reduces the motivation to switch providers as long as the incumbent is meeting a minimum expected level of performance.

Nice's net revenue retention is typically around 110%-115%, which is a good indicator of switching costs on an absolute basis. Genesys and Five9 generally report net revenue retention in a similar range.

Financial crime and compliance contribute around 15% of total revenue. Nice’s software solutions help financial institutions detect fraud and money laundering and meet their compliance and regulatory obligations. Consequently, similar to customer engagement, the mission-critical nature of these functions results in high switching costs. Nice has a full cloud offering for large financial institutions (X-Sight) and small and midsize financial institutions (Xceed), but the majority of the business is still on-premises. We think this segment is weighted to the large enterprise side of the market. Customers include the top 10 US banks, European banks, and global investment banks. Given the legal and regulatory aspects of this business, the slow industrywide transition to the cloud, and Nice’s revenue being skewed to larger enterprises, we think switching costs are stronger here than in the customer engagement segment. Segment margins that are much higher in FC&C than customer engagement support this notion.

Industry experts believe AI could expand the CCaaS total addressable market by up to 10 times.

Switching costs should get stronger as more large enterprise customers adopt Nice's CXone CCaaS platform.

Nice has strong user retention metrics, with net dollar retention around 110%-115%.

Nice's CCaaS revenue growth rate has been declining steadily in recent years despite its leading position and high market growth expectations.

The potential for AI to revolutionize the contact center industry could lead to increasing competition.

Nice is underinvested in deployment capacity and international infrastructure, which has slowed CXone revenue growth despite good progress in large enterprise and international bookings.