Zebra: In an upcycle + structural growth

Zebra (ZBRA) is an industrial solutions company, with limited visibility, and subject to fluctuations in the capex cycle, hence not for everyone.

Quality is solid, and we think misrepresented in the low valuation put on the shares. Most products focus on niche applications with an oligopolistic market structure selling to enterprise customers where TCO is going to be a dominant force, as is the repair / service component.
To realise our upside, we would need the market to accept that Zebra has changed, and that growth drivers are strong and secular. We think this happens through continued beat / raise quarters.

The secular growth scenario:

logistics/transportation, e-commerce and healthcare (~50% of revenues) have strong tailwinds and increased used cases for next 5 + years.
Combine this tailwind with Zebra market share gains due to Android and an energised reseller channel and it is easy to get to 7%-8% structural growth.
Zebra was the first company to launch Android products for the enterprise market and that certainly benefited it, gaining ~60% market share of Android devices vs approx. 40% share of all mobile compute devices.
Just surfing the Android adoption wave for the next couple of years adds 5% growth to 55% of Zebra’s revenues relative to ~3% market growth. i.e. a 2.5% tailwind.

Potential Upside: $228 (+31%): Structural changes and share gains mean that growth remains 7-8% for 3-4 years, not 3-4%.

Sensible Downside: $147 (-15%): Low growth scenario of 3%, cyclical tailwind ends in 2019.

Abacus Research LLP