Zebra Earnings: Demand Pushouts Continue as Weak Q3 Meets Our Expectations

We maintain our $345 fair value estimate for shares of narrow-moat Zebra Technologies ZBRA after third-quarter results were expectedly weak. Zebra is dealing with soft demand across its served markets, as customers push out new orders and refresh amid budget tightening. We see these dynamics affecting the firm through the next few quarters, but we continue to view this as pushed-out, not cancelled, demand. We believe Zebra’s solutions are critical to customers and embed deeply in their organizations, making order refreshes a matter of when, not if. We see shares as materially undervalued.

Third-quarter sales dropped 31% year over year and 21% sequentially to $960 million. All of Zebra’s served markets, geographies, and segments declined both year over year and sequentially. The firm’s weakness is most pronounced in its mobile computers for larger retail and transportation customers, especially e-commerce providers like Amazon. Customers are opting to extend the useful lives of Zebra’s equipment in order to reduce expenses against softer end-consumer demand. Elsewhere, Zebra’s distribution partners are slowing their own orders to clear inventory built up during pandemic-era demand.

Non-GAAP gross margin declined 100 basis points year over year and 320 basis points sequentially to 44.8%, primarily due to weak volume. Positively, Zebra is no longer dealing with elevated supply chain costs that have weighed on gross margin the past two years, and we believe pricing should be a tailwind to gross margin over the next year.

Fourth-quarter guidance was weak and within our expectations. Zebra expects sales to drop more than 30% year over year, which still implies sequential improvement from the third quarter. We expect results through the income statement to improve sequentially now through 2024, but for an overall recovery to be gradual. Zebra isn’t expecting meaningful recovery in the first half of 2024 but did see distributor destocking peak in the third quarter.