AI And Calculated Acquisitions Set To Propel Mobile Computing Giant Into A New Era Of Growth

Key Takeaways

• Introduction of AI and LLMs in Zebra's devices is expected to increase appeal and demand, improving operational efficiencies for customers.
  
• Strategic acquisitions aim to expand technology offerings and market reach, potentially driving growth in new and existing markets.
  
• Dependence on large order recoveries and managing increased operating and supply chain costs amid cautious customer spending could challenge revenue and margin growth.

Catalysts

Provides enterprise asset intelligence solutions in the automatic identification and data capture solutions industry worldwide.

• The introduction of AI and large language models (LLMs) on Zebra’s mobile computing devices presents a forward-looking catalyst that is expected to enhance the functionality and appeal of these devices. This innovation has the potential to expand use cases and improve operational efficiencies for Zebra's customers, which could drive demand for mobile computing products and positively impact revenue growth.
  
• Zebra’s restructuring actions, aimed at delivering $120 million of net annualized operating savings, signify operational efficiencies that could enhance net margins. The realization of these savings is anticipated to not only reduce costs but also improve profitability, contributing to an increase in net margins over time.
  
• The momentum in demand across Zebra’s end markets, especially in healthcare and retail, suggests potential for revenue growth. Healthcare, showing double-digit growth due to mobile computing, and retail, demonstrating early recovery, highlight sectors where Zebra is poised for increased sales, impacting revenue positively.
  
• The company’s focus on strategic acquisitions, like those of Fetch Robotics and Matrox Imaging, illustrates an investment in expanding Zebra's technology offerings and market reach. Such acquisitions enable Zebra to offer more comprehensive solutions, driving growth in new and existing markets that could contribute to both revenue and earnings expansion.
  
• Zebra’s continued strength in services and software, with strong attach rates and expanding offerings, present a catalyst for recurring revenue streams. This segment of Zebra's business not only adds to revenue growth but also enhances customer stickiness, leading to potentially higher margins over time due to the scalable nature of software services.

Assumptions

• Analysts are assuming Zebra Technologies's revenue will grow by 9.7% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 5.3% today to 0.1% in 3 years time.
• Analysts expect earnings to reach $771.0 million (and earnings per share of $15.21) by about August 2027, up from $230.0 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as $657 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 30.5x on those 2027 earnings, down from 77.3x today. This future PE is greater than the current PE for the US Electronic industry at 22.1x.
• Analysts expect the number of shares outstanding to grow by 0.47% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 7.22%, as per the Simply Wall St company report.

Risks

• The cautious spending behavior of customers on large deployments not returning to historical levels could limit significant revenue growth opportunities.
  
• Challenges in the manufacturing sector, as indicated by its slower recovery, might affect sales in key vertical markets, potentially impacting revenue diversity and growth.
  
• The rise in operating expenses due to normalized incentive compensation, despite cost-saving measures, could pressure operating margins if revenue growth doesn't outpace expense growth.
  
• The modest increase in shipping rates and supply chain costs, despite being accounted for in the full-year guide, presents a risk to gross margin expansion if these costs escalate beyond expectations.
  
• Dependence on the recovery and growth of large order activity, which remains below historic levels, could result in volatility in revenue and earnings if customer confidence doesn't improve or macroeconomic conditions worsen.

Valuation

• The analysts have a consensus price target of $367.2 for Zebra Technologies based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $410.0, and the most bearish reporting a price target of just $290.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $5.7 billion, earnings will come to $771.0 million, and it would be trading on a PE ratio of 30.5x, assuming you use a discount rate of 7.2%.
  
• Given the current share price of $344.85, the analyst's price target of $367.2 is 6.1% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.