Zebra Earnings: Softer-Than-Expected 2023 Doesn’t Deter Our Long-Term Growth Thesis

We lower our fair value estimate for narrow-moat Zebra Technologies ZBRA to $381 per share, from $410, following solid first-quarter results and a cut to the company’s full-year guide. We had been expecting softness in 2023 but now expect a steeper decline for Zebra’s sales. Management cited deeper levels of project deferrals, tighter retail capital expenditures, and inventory destocking at distributors as primary culprits for slashing guidance. Though 2023 is coming in below our initial expectations, we maintain our view that current softness will be short-lived. We have yet to see evidence of any orders being canceled and view customers as being able to push out orders of Zebra’s solutions only for so long. Zebra is prone to the broader macroeconomic environment and customer spending patterns in the short term, but we are confident in its comprehensive, sticky portfolio generating profitable growth in the long term. The near term will require patience, but we continue to see an attractive entry point for long-term investors.

First-quarter sales of $1.4 billion dropped 2% year over year and 6% sequentially, primarily from weakness in the enterprise segment. Enterprise sales typically include solution sets with mobile computers and software, and large retail customers like Amazon have been pushing out orders. We don’t believe these orders are being canceled. The smaller printing segment had a strong quarter, with 25% year-over-year growth supported by one-time backlog reduction.

Non-GAAP gross margin of 47.5% rose 290 basis points year over year and 190 basis points sequentially. Profitability is being helped by an easing of supply constraint costs and pricing actions taking effect this year. We see the current level as improved for Zebra but believe it will operate at normalized levels between 48% and 49% once all superfluous costs work down.