Zebra’s 2023 Will Be Challenging, but Long-Term Prospects Remain Bright and Shares Are Cheap

We trim our fair value estimate for narrow-moat Zebra Technologies to $410, from $417, after it reported a good fourth quarter but guided for a tough 2023. Zebra is experiencing softer demand across its end customers and verticals, predominantly pushing out spending into future years. Though we don’t see Zebra’s customers canceling orders or destroying demand, we see pushouts impacting 2023 results. Nevertheless, we remain long-term bulls on Zebra. We believe its end-to-end solution set for digital transformation creates sticky customer relationships and is a prioritized expense for enterprises. In our view, long-term-focused investors should continue to see an attractive entry point for Zebra.

Fourth-quarter sales rose 2% year over year and 9% sequentially, reflecting a quick rebound from operational miscues that impacted third-quarter results. The printing-focused AIT segment shined with 10% year-over-year growth, compared with a 1% year-over-year decline for the larger, computing-focused EVM segment. Overall for 2022, AIT outperformed EVM, reflecting the higher base of recurring revenue in the segment versus more greenfield capital expenses out of EVM. Long term, we still view EVM as the higher growth of the two segments, especially when enterprise spending rebounds.

Non-GAAP gross margin continues to be challenged, dropping 10 basis points year over year to 45.6%. Elevated logistics costs had been about a 2%-4% headwind to gross margin in 2022, but we expect that to be mostly alleviated exiting 2023. However, now Zebra is facing headwinds to margins from foreign exchange that should keep them somewhat depressed in 2023. We see Zebra’s fundamental gross margin around 49% currently, but it will take time to realize that in reported results.

First-quarter guidance implies an increasingly challenging demand environment but one with alleviating supply. The guidance midpoint for sales implies a low-single-digit year-over-year decline but sequential margin expansion.