Zebra Technologies

Moat: 3/5

Understandability: 3/5

Balance Sheet Health: 4/5

Zebra Technologies is a global leader in providing enterprise asset intelligence solutions, specializing in barcode printing and automatic identification technologies, with a focus on enhancing operational efficiency and data capture.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview:

Zebra Technologies (ZBRA) operates in the Automatic Identification and Data Capture (AIDC) market, a space where technology is applied to improve efficiency in workflows by automatically recognizing and tracking various assets. They offer a suite of products and services, including barcode printers, scanners, RFID solutions, mobile computers, and related software and support. While seemingly niche, these solutions are utilized in a vast number of industries, from retail to healthcare and transportation and logistics, to manufacturing.

  • Revenue Distribution: ZBRA operates through two main business segments:
    • Asset Intelligence & Tracking (AIT): Includes mobile computing, scanning, and printing products and solutions.
    • Enterprise Visibility & Mobility (EVM): Focuses on software, solutions, and services which support data analytics, workflow optimization and real-time visibility into operations.

  • Industry Trends: The AIDC market is expected to grow given the emphasis on automation and supply chain digitalization. Trends shaping the industry: * The move towards omni-channel retail requires real-time inventory visibility. * E-commerce boom pushing growth in logistics and supply chain industries. * Healthcare’s growing emphasis on patient safety and automation. * Increased focus on supply chain optimization across multiple sectors * Growing demands of traceability and compliance * The digitization of workflows and processes * Emergence of real-time location systems (RTLS) with high growth prospects * AI and Analytics improving decision-making ability in various processes

  • Margins: As a technology provider, ZBRA boasts relatively healthy gross margins that typically remain above 40% and operating margins above 20% or so. However, we see variation in operating margins and gross profit margins during inflationary periods, due to increases in supply chain costs. We must closely watch whether margins will be able to sustain themselves or will drop further. It appears they are taking necessary steps to manage costs and maintain profitability. It also has a variable cost structure.

  • Competitive Landscape: The AIDC market is competitive with some large players (Honeywell), but ZBRA has a strong position in this market and holds significant market share, often being a market leader. The competition landscape is largely fragmented with competitors specializing in one area of expertise.

  • What Makes Zebra Different:
    • They don’t compete on price only, because products are highly specialized and offer high customer value.
    • Zebra has a large partner network for manufacturing, distributing and maintaining their products across many geographical areas. This extensive partner network adds a layer of service and scale, making them an important player in the market.
    • They have a strong brand image with over 50 years in the business and a large customer base (large businesses and government clients), making switching to another supplier unlikely, as integrating ZBRA with customer business operations takes time and effort.

Moat Assessment:

Zebra Technologies possesses a narrow moat (3/5), based on a combination of factors:

Moats should provide a reasonable degree of durability as they give a company an edge over its competitors.

  1. Customer Switching Costs: The company’s solutions, particularly its software suites, tend to become deeply integrated with customer workflows. The integration of data in companies systems creates a “lock-in effect” by making it costly for clients to switch to competitors. High switching costs usually contribute to strong retention and create consistent revenue streams and give some pricing power for ZBRA.
  2. Intangible Assets: ZBRA has a substantial history in the industry, building strong brand loyalty and an extensive intellectual property portfolio consisting of hundreds of patents. This history and patents give them a competitive edge over new entrants.
  3. Economies of Scale and Scope: The sheer scale of their operations, particularly in manufacturing and global distribution, gives ZBRA a cost advantage compared to smaller competitors. Their large supply chain can help lower costs. They also serve diverse industries, which is part of the company’s scope advantage.
  4. Network Effect: In some areas like their software and data management, the more customers use it, the better the service becomes because the system has more data to work with.

However, this moat is not considered to be wide because:

  1. The brand recognition is only notable in the B2B segment (not widely known by general public), thus they cannot leverage this as much as a consumer-facing company could.
  2. The cost advantages are likely not the highest, because they still face some competition for price-sensitive customers.
  3. There are many competitors in the space (though mostly on smaller, less scalable levels), and a new technology may quickly overtake established products in the market.

Risks to the Moat and Business Resilience:

Zebra Technologies, like any business, faces risks that could weaken its moat and affect its financial results.

  1. Technological Disruption: The AIDC industry is subject to rapid technological advancements. New technologies might emerge and replace existing solutions or make their products obsolete. This is a huge risk to ZBRA which must continually invest in R&D to keep ahead of competitors.
  2. Intense Competition: As technology evolves and new innovations emerge, competitors may disrupt or erode ZBRA’s position in certain segments of the market. More competitors are trying to implement new solutions, this results in price pressures, which, in turn, can affect profit margins.
  3. Supply Chain Vulnerability: ZBRA’s heavy reliance on international supply chains means they are at high risk of disruption. During the past few years, we have seen a lot of disruption due to geopolitical reasons, inflation, and COVID-19 related problems. This is an inherent risk they have to contend with. While management has been trying to increase manufacturing in new regions, it’s still a very volatile topic.
  4. Economic Slowdowns and Recessions: As business spending decreases during recessions or periods of economic slowdown, demand for ZBRA’s solutions (which are primarily used in businesses) declines. Businesses may cut down on new tech investments during periods of slowdown. This is an important factor to consider, as their sales revenue can get heavily affected. The current global economic outlook seems unclear and has a lot of negative predictions, so there is a higher likelihood of this occurring in the near future.
  5. Dependence on Key Partners: Since ZBRA has a wide global distribution network, it is at risk of any change in conditions that can negatively affect its partners. They may also need to deal with disputes in contracts that can also result in business problems.
  6. Data security: As a technology provider, ZBRA must protect the sensitive data they process. It is important that they avoid having a data breach that could impact customers’ security and lower trust in the company.

Despite these risks, ZBRA has demonstrated resilience as a company. Their diverse industry exposure and geographical diversification allow them to mitigate risk and create a sustainable business. Their customer base is well-established and they have good relations with their clients. This all helps in improving the company’s long-term financial position.

Financials Deep-Dive:

The financials of ZBRA paint a picture of a company experiencing some recent challenges and with a possible bright future.

  • Income Statements (Latest Quarters):
    • They saw a strong revenue growth over the years (but primarily due to acquisitions).
    • Operating income has fluctuated. It increased significantly for the most part of the years, but decreased significantly in the last two quarters.
    • Net income has seen similar volatility, growing a lot in the past years, then losing a chunk of the gain in 2022-2023.
    • Margins are inconsistent and fluctuate greatly. This was largely attributable to supply chain disruptions and high inflation. These cost pressures appear to be coming under control by management.
    • Net sales grew by 14.8% year-over-year. This was largely driven by AIT sales (19.9%) with EVM sales declining by 1.5%. That shows the impact of supply chain disruptions and global changes.
  • Balance Sheet Health (Rating: 4 / 5):
    • ZBRA maintains a relatively healthy balance sheet with a high amount of cash and short-term investments.
    • The company’s total debt has increased recently to $2.5 billion. But the overall capital structure is not highly leveraged, with only a 48.5% debt-to-equity ratio.
    • They do have a large value of goodwill and acquired intangibles, as a consequence of their acquisition strategies, worth over $6 billion. However, these have not been as impactful as normal tangible assets when it comes to measuring value for financial services firms (such as banks).
    • The financial situation is quite strong. The company has enough cash and short-term assets to meet its short-term liabilities, even though their leverage is slightly higher.
  • Cash Flow Statement: ZBRA has been able to generate strong cash flow, they have over $500 million cash flow from operations, which can be used for debt repayment and further investments and acquisitions. This allows them to allocate capital efficiently, which further grows their business. Their free cash flow has decreased, but this is not abnormal during times of uncertainty.
    • Their capital expenditure has been growing, mostly due to R&D, but their investments have high potential and have contributed to recent earnings growth and brand loyalty.

Understandability (Rating: 3 / 5):

Zebra’s business is moderately complex. They are specialized products used in many industries, which makes their business complex. Here is what we look at for understandability:

  • The company has a complex business model because the number of products are varied and have uses in different industries. ZBRA is a global company with operations in many geographical locations, which further adds complexity. Their financial statements can be difficult to interpret for a novice investor.
  • The company relies on various software solutions and integration with other systems, further complicating things. Also, some of their business models involve recurring revenue models.
  • However, their operations are not that difficult to understand because they are a B2B company that sells devices and software that automate daily tasks in a vast range of industries. This is quite easily understandable even if all the metrics are not familiar.

Recent Concerns / Controversies & Management Response:

  • Weakening Global Economy: With the current global uncertainty and the possibility of a recession, the demand for their products might be hurt in the short term. Companies might pull back on capital expenditures which would affect ZBRA’s revenues.

  • High Competition and Price Pressures: Some investors are concerned with the price sensitivity of their products as they face competition and substitute products. This may cause their revenues to fall or their margins to shrink, which is a significant point that the company needs to address.

  • Management Response:
    • The management has acknowledged the problems with the overall economic climate and expects continued volatility, but their overall sentiment remains positive. They are targeting long-term growth strategies.
    • They have reiterated the focus on long-term growth rather than short-term gains and believe they are positioned to tackle current economic conditions.
    • They are planning to focus on “software solutions” that have much higher profit margins and lower costs. This shift could help protect their profit and revenues during hard economic times.
    • They are also planning on focusing on growth in emerging markets, as they are not as vulnerable to current economic uncertainty.

Conclusion

Zebra Technologies is a solid company with a narrow moat due to switching costs and intangible assets. However, they are still at risk of disruption and changes in global economies. They have solid financials, but their growth and profitability are still linked to the global economy, which is unpredictable at times.