The 'Track and Trace' Leader Is Hitting New Highs

The pandemic has changed the world in ways that we'd never thought possible a year ago...

As we've covered in the past, secular trends have accelerated as we've been forced to cope with a drastically different landscape. That's especially true with online shopping...

According to consulting firm McKinsey, 10 years of e-commerce adoption was squeezed into just the first three months of the pandemic. And this is expected to continue into the future.

Whenever we shop online to get essential products – and generally pass the time and spend our stimulus checks – a lot more goes on behind the scenes to get our packages from the warehouse to our porches. Take this past holiday season as an example...

Shipping companies were so overrun with demand that many stopped accepting packages in the weeks leading up to Christmas. And those that did accept packages did so with warnings they may not make it by the holiday.

All of this puts a microscope on logistics, from shipping to tracking. And the company that dominates the track-and-trace industry for global e-commerce is Zebra Technologies (Nasdaq: ZBRA).

U.S.-based Zebra supplies hardware and software to 10,000-plus businesses and organizations in more than 100 countries. As of December 31, the company owned about 2,100 trademark registrations and trademark applications, along with about 5,300 patents and patent applications.

One Zebra client is the NFL, for which it tracks player performance during live games. This highlights how useful its technology is and shows that Zebra is the top innovator among its peers.

But the company's value to investors doesn't reside solely – or even primarily – with its NFL partnership. The real value to Zebra's technology comes from much larger industries, like retail and e-commerce, manufacturing, transportation and logistics, and health care.

Zebra sells small handheld devices that read barcodes and radio-frequency identification ("RFID") tags. The company's systems track merchandise and inventory with extraordinary accuracy. It also sells printers (both handheld and industrial) that make barcode or RFID labeling on the spot. The company supports its hardware with a suite of software that makes sense of the data captured.

Zebra sells about 20% of its products through third-party vendors. But it also sells directly to the most well-known companies on the planet, like Walmart (WMT), Apple (AAPL), United Parcel Service (UPS), FedEx (FDX), Costco Wholesale (COST), Kroger (KR), and even Amazon (AMZN).

It's hard to find a big-box retailer, grocer, or shipping company that isn't one of Zebra's customers. Zebra is unique because – unlike close competitors Honeywell (HON) and Panasonic (PCRFY) – it's essentially a pure-play investment opportunity in track-and-trace technology.

Even though most smartphones can read barcodes (that's not the case for RFIDs), you still need the back-end software that Zebra provides to put it to good use on a larger scale. Without barcodes, RFIDs, and Zebra's technology to read them, the world would come screeching to a halt...

Barcoding – which is a much older technology than RFID – is a keyless entry method. The technology originated in grocery stores as an automatic-identification (auto-ID) and data-collection method. It saves time during checkout and helps grocers track inventory.

Barcodes require an optical barcode reader or scanner, like the ones Zebra sells. The scanner decodes the pattern of black bars, which generally represents a series of numbers. Software within the scanner interprets the pattern. Information within a barcode often contains manufacturer data, the product, and the price.

Zebra has a roughly $27 billion market cap, $168 million in cash, and $1.3 billion in debt. This gives it an enterprise value ("EV") of approximately $28 billion. We like to look at EV instead of market cap alone because it eliminates benefits and disadvantages from the use of debt. So EV gives us an apples-to-apples comparison.

Zebra's revenues have grown steadily, with growth rates ranging from 4% to 13% over the past three years.

It has shown an impressive ability to grow its bottom line as well. Since 2016, Zebra has expanded its profits and margins considerably. Its operating margin, profit margin, and earnings before interest, taxes, depreciation, and amortization ("EBITDA") have all grown substantially, despite modest sales growth.

These are signs of a strong business. And shareholders have been rewarded...

Over the past year, ZBRA shares have soared. The stock has more than doubled over the past 12 months, and it recently hit a fresh all-time high. And the gains likely aren't done just yet...

Zebra provides a mission-critical service for the rapidly growing e-commerce industry. Given its leading market share, companies will continue to turn to Zebra as they expand their online presence. That should be an extended tailwind for the shares.

Sometimes investing is simple.