Zebra Technologies Stock Drops 10% as Memory Costs Squeeze Margins and Outlook Disappoints Despite Beat

Shares of Zebra Technologies fell 10% Tuesday after the maker of barcode scanners and mobile computers reported shrinking margins and a fourth-quarter profit forecast slightly below Wall Street's expectations. Its third-quarter results had beaten estimates.

The Nasdaq-listed stock, which trades under the ticker ZBRA, fell $36.10 to $325.04 in morning trading, from Monday's close of $361.13. The company's market value fell to about $15.4 billion.

Quarter beat estimates

Zebra, based in Lincolnshire, Illinois, reported adjusted earnings of $4.95 per share for the quarter ended Oct. 3, above analysts' estimate of $4.89.

Revenue rose 22.3% to $1.61 billion, ahead of the $1.57 billion analysts expected. Organic sales growth was 11.3%.

The company's Connected Frontline segment, which sells mobile computers and other devices for workers in retail, warehouses and other front-line jobs, reported revenue of $949 million, up 34.6%.

CEO Bill Burns credited "strong execution and broad-based demand trends" for the quarter.

Margins shrink

Gross margin fell to 45.7% from 48.0% a year earlier. Zebra said the drop was mainly due to higher memory component costs and a less favorable mix of products.

Executives said the company faced about $50 million in cost increases during the quarter and recovered about $25 million through price increases.

Memory chip prices have risen across the electronics industry because of heavy demand from artificial intelligence data centers.

Guidance slightly below expectations

Zebra expects fourth-quarter adjusted earnings of $5.00 to $5.40 per share. The midpoint of $5.20 is just below analysts' consensus estimate of $5.21.

The company kept its forecast for full-year free cash flow of at least $1 billion.

Cash returns

Zebra bought back $75 million of stock in the third quarter, bringing its total for the year to more than $640 million. It generated $661 million in free cash flow over the first nine months and ended the quarter with a debt leverage ratio of 1.6 times.

A high-expectations stock

The shares had risen about 39% over the past 52 weeks before Tuesday's drop. The stock trades at about 33 times trailing earnings, above its five-year median.

Analysts generally remain positive on the company. Most rate the stock a buy, and none rate it a sell.

What to watch

Investors will watch whether Zebra can raise prices enough to offset higher memory costs, whether margins recover and whether demand from retail and logistics customers stays strong into next year.