Zebra Technologies’ Record Quarter Came With a 2027 Margin Warning

Zebra Technologies (NASDAQ:ZBRA) turned in its third-quarter homework this morning, and at first glance, there wasn't much to complain about.

Revenue rose 22.3% year over year to a record $1.61 billion, and adjusted earnings of $4.95 per share topped the high end of management's guidance. Both figures beat Wall Street's consensus estimates. The maker of barcode scanners, rugged mobile computers, and RFID equipment also raised its full-year sales growth target to about 17%, up from 14% to 16% in the Q2 update. Its bottom-line projections for the fourth quarter landed in line with current analyst expectations.

And the stock fell as much as 17% in pre-market trading. Whatever bullish mojo was left over from August's second-quarter report is gone.

What happened?

Image source: Zebra Technologies.

Rising chip costs meet a 15% price hike

Short version: the market skipped past the headline-inspiring numbers at the top of the paper and went straight to the profit margins. Specifically, traders focused on next year's margin trends.

On the earnings call, CEO Bill Burns said fourth-quarter profitability should serve as a "baseline" for 2027. Zebra expects a fourth-quarter adjusted EBITDA margin of about 22%, while the full-year 2026 figure should land around 23.5%. So 2027 starts out roughly 1.5 percentage points thinner than this year. Burns noted that the 2026 figure includes tariff refunds, and that Zebra held margins flat in Q3 and expects the same in Q4 despite memory costs. Footnotes on your asterisks, you know.

Lower margins on deals with hefty customers played a part, but the main culprit is memory chips. Zebra's mobile computers need plenty of them, and the company is a price-taker here. It doesn't set memory prices; it pays them. The full-year memory cost headwind grew to about $145 million, up from $120 million in August. Zebra sold more mobile computers than expected, which sounds great until you remember each one now costs more to build and relies on scarce memory supply. Price increases covered only about half of the roughly $50 million increase in memory costs in the third quarter.

Zebra raised mobile computer prices by about 15% in October to close the gap. Offsetting memory costs dollar-for-dollar keeps profits whole but shrinks the margin percentage. That's why the margin rate dips even when the pricing works.

In a follow-up interview, Burns admitted that there's customer friction over Zebra's price increases. "They don't like it, nor do we."

But it's an industrywide thing, and arguably the right move. Zebra's customers expected price talks in this economy, because the painful component costs are everywhere.

"They said things like, 'Oh, we were waiting for you to come to us,' because others were already out there," Burns told me. Higher prices didn't surprise anybody.

And the headline growth number deserves a footnote. Roughly half of the third quarter's sales growth came from the Elo Touch acquisition and currency effects; organic growth was still healthy at 11.3%. Elo just passed its first anniversary under Zebra, so growth from here will be mostly organic. And according to the CFO, the third-quarter beat largely came from securing additional memory supply. The demand was already there.

The AI irony behind Zebra's margin squeeze

There's a bit of irony in all this. Zebra pitches itself as the plumbing between AI and the physical world: the scanners, trackers, and handheld computers that feed real-world data into AI systems. Meanwhile, the AI boom is widely blamed for driving up memory price, squeezing Zebra's margins.

AI is mostly a reason to buy new Zebra hardware today. Software accounts for a low-single-digit percentage of revenue. Still, management sees a multiyear refresh cycle among transportation and logistics customers starting in 2027 and expects next year's growth to hit the high end of its 5% to 7% long-term target.

I asked Burns whether AI is good or bad for Zebra overall. He laughed and called AI "a net positive" for Zebra, though "it's still early days."

At roughly $334 per share on Tuesday afternoon, Zebra trades at about 15 times forward earnings estimates, though those estimates may well come down after this report. If Zebra's price increases catch up with chip costs by late 2027 without undermining demand, this sell-off may look like an overreaction. If memory keeps climbing higher than projected, these bearish investors were simply early.

Anders Bylund has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Zebra Technologies. The Motley Fool has a disclosure policy.