Zebra Earnings: 2023 Demand Now Looks Weaker, but We’re Still Confident for the Long Term

We are lowering our fair value estimate for narrow-moat Zebra Technologies ZBRA to $345 per share from $381 after it missed our second-quarter expectations and cut its full-year outlook. Zebra painted a significantly weaker demand picture than last quarter, with slower spending and project pushouts across its customer base in every region. We are pushing out our forecast for a rebound for Zebra into the second half of 2024 and 2025 and expect the rest of 2023 to be challenging. We believe the current spending softness reflects rocky end-market demand in the wake of growth and customer inventory buildup as the pandemic subsided and not any weakening of Zebra’s value proposition with customers. Long term, we continue to expect growth as Zebra enables customers’ digital transformation and embeds itself in their workflows. Shares sold off significantly after Zebra reported, and we continue to view them as undervalued for long-term investors willing to endure a soft short-term environment.

Second-quarter sales dropped 17% year over year and 14% sequentially to $1.2 billion, which was well short of our model. While all of Zebra’s customers are slowing spending, we believe its largest e-commerce and retail customers are having the greatest effect on results. Customers are pushing out project launches in response to lower consumer demand, and Zebra’s distribution channel continues to work down elevated inventories. Positively, management is not seeing order cancellations.

Non-GAAP gross margin of 48% was a bright spot, rising 200 basis points year over year and 50 basis points sequentially. Margin pressure has afflicted Zebra for two years since the pandemic, and pricing actions are now completely offsetting logistics and inflation costs. While we expect margins to compress in the second half behind lower volume, we believe Zebra can achieve high-40% gross margin when volumes return, reflecting structurally improved profitability than it historically earned.