Zebra Technologies Q3: Broad Demand Recovery

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Zebra Technologies Corporation shows strong growth with a 31.3% revenue increase and 141.4% adjusted EBITDA growth, driven by digitalization and automation trends.Asset Intelligence & Tracking and ...

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Paul Bradbury/OJO Images via Getty Images  I discussed how Zebra Technologies Corporation's (NASDAQ:ZBRA) long-term growth drivers lie in digitalization and automation trends in my previous “Buy” rating in September 2024. Zebra delivered a strong Q3 result with 31.3% revenue growth, beating the market expectations. I reiterate a “Buy” rating with a one-year target price of $450 per share. Broadened Demand Recovery Zebra released its Q3 FY24 result on October 29th, reporting 31.3% growth in revenue and 141.4% growth in adjusted EBITDA. As depicted in the chart below, Zebra has experienced a growth recovery in both revenue and profits in recent quarters.   Zebra Technologies Quarterly Results More specifically, the Asset Intelligence & Tracking segment grew by 25.8% year-over-year, driven by the market recovery for printing and RFID solutions. The Enterprise Visibility & Mobility segment sales increased by 33% fueled by strong demands for mobile computing and data capture solutions, as noted during the earnings call. My key takeaway from the quarter is the notable market recovery among retailers and e-commerce vendors, underpinned by a continued shift toward omnichannel business models. As discussed in my previous article, Zebra’s products and solutions are highly aligned with the structural growth in omnichannel transformations. Outlook and Valuation During the earnings call, the management expressed strong confidence in the seasonality growth for both Asset Intelligence & Tracking and Enterprise Visibility & Mobility segments in Q4 and FY25. Due to the strong performance, the company is guiding for 28%-31% revenue growth for Q4, underscoring a strong end-market recovery ahead.   Zebra Technologies Investor Presentation It is impressive that the company is guiding for around $850 million in free cash flow for FY24, a significant turnaround from the $91 million outflow in FY23. The strong free cash flow growth is driven by both capex reduction and profitability improvement due to operating leverage. Zebra exited the quarter with 1.6x debt leverage, sustaining a robust balance sheet for shares repurchase and M&A. For the near-term growth, I am considering the following factors:  Asset Intelligence & Tracking: The segment includes barcode and card printing, RFID and RTLS offerings. I think the segment growth will be driven by structural demands from omnichannel and e-commerce. As most retailers prioritize omnichannel initiatives, I believe Zebra can benefit significantly. I forecast the segment will grow by 8% annually, driven by 5% volume growth and 3% price/mix growth, resulting from price increases and higher ASP product offerings. Enterprise Visibility & Mobility: The business offers mobile computing, data capture, machine vision, and workflow optimization solutions. As discussed in my previous article, Zebra’s workflow optimization solutions can help customers improve the productivity of key operational workflows by conducting data analysis in real-time. I believe the segment will grow by 6.5% annually, aligned with the historical average. As noted during the earnings call, M&A remains a growth priority for Zebra and the company has a strong balance sheet to support future M&A. I assume the company will allocate 10% of revenue toward M&A, contributing 2.5% growth to the topline. I project 40 bps annual margin expansion, driven by 15bps from new product offerings, 15bps from a reduction in SG&A expenses, and 10 bps from R&D operating leverage. I estimate the total operating expenses will grow by 8.9% annually, resulting in a 40 bps annual margin expansion. The cost of equity is calculated to be 13.8% assuming: a risk-free rate of 3.6%; a beta of 1.7; and an equity risk premium of 6%.  With these assumptions, I calculate the free cash flow from equity (FCFE) as follows:   Zebra Technologies DCF Discounting all the future FCFE to the year-end of FY25, the one-year target price is calculated to be $450 per share, as per my estimates. Key Risks During the earnings call, the management pointed out their China business has experienced some challenges caused by weak economic growth. The manufacturing activity has been particularly soft in China, as depicted in the chart below. I don’t think the Chinese economy will recover soon, and continued sluggish manufacturing growth could pose some growth headwinds for Zebra.   Statista In addition, Zebra has nearly 50% of finished goods production based in China. If there are any tariffs in the future, Zebra’s margin could be affected, at least in the near term. End Note  Zebra Technologies has delivered strong quarterly results, driven by a broad-based market recovery in both mobile computing and printing /RFID solutions. I reiterate a “Buy” rating with a one-year target price of $450 per share.","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"analysis","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.29.2","shortVersion":"4.29.2","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2485291975"}