As Security Concerns Erupt, Is It Time To Sell Zoom Video Stock?
Investing.com | Apr 03, 2020 17:01
A storm is gathering around Zoom Video Communications (NASDAQ:ZM). After more than doubling in its value this year, the shares of this teleconferencing provider are sinking fast as consumers and regulators raise privacy and security concerns.
The backlash against Zoom intensified during the past week as millions of workers and students flocked to providers of digital communications, after the coronavirus pandemic forced countries to lockdown their citizens. In March, Zoom’s daily users ballooned to more than 200 million from the earlier peak of 10 million, the video conferencing app disclosed on Wednesday.
But that surge also laid bare the weakness of its platform. The Federal Bureau of Investigation’s Boston office recently issued a warning about Zoom, telling users not to make meetings on the site public or share links widely after it received two reports of unidentified individuals invading school sessions, a phenomenon known as “zoombombing.”
A couple of days later, billionaire Elon Musk’s rocket company SpaceX banned its employees from using the Zoom app in a memo seen by Reuters, saying the app had “significant privacy and security concerns.”
Zoom was also sued by a user who claims the video-conferencing service is illegally disclosing personal information. The company collects information when users install or open the Zoom application and shares it, without proper notice, to third parties including Facebook Inc (NASDAQ:FB)., according to the lawsuit, filed Monday in federal court in San Jose, California. In addition to the user lawsuit, the New York Times reported that the company is facing scrutiny from New York’s attorney general.
h2 Flurry of Negative Developments/h2Amid a flurry of this negative publicity around the company’s privacy practices, Zoom stock has lost 35% of its value since hitting an all-time high of $164.94 on March 23, raising questions about the stock’s long-term appeal and the seriousness of privacy breaches. The stock closed Thursday at $121.93, down 11% for the day.
The latest developments certainly raise pressure on the company to quickly fix its privacy issues and make its application free from intrusions, but we don’t think it poses an existential threat to its business model. Other social media companies have been able to grow while facing user privacy issues and legal challenges.
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That's why, despite these setbacks, some analysts still see value in Zoom which has become the default definition for videoconferencing.
Sanford C. Bernstein analysts said in a note cited by Bloomberg that they continue to recommend buying Zoom as paid user adoption has surged dramatically. Bernstein cited a recent survey it had conducted of employed U.S. adults, which showed that “anywhere from 7 per cent to 20 per cent are paying for a Zoom subscription for personal use,” a trend that could add “a few hundred million” to full-year revenue.
Zoom said last month, its full-year revenue should reach $905 million to $915 million, a jump of at least 45% from the previous financial year.
Separately, RBC Capital Markets raised its price target to $125 from $110, citing data that show a surge in downloads for Zoom’s app.
While addressing these concerns, Zoom said that the company is dedicating the resources needed to better identify, address, and fix issues proactively in the next three months.
“We recognize that we have fallen short of the community’s — and our own — privacy and security expectations,” founder and Chief Executive Officer Eric Yuan wrote in a letter to Zoom users on Wednesday. “We now have a much broader set of users who are utilizing our product in a myriad of unexpected ways, presenting us with challenges we did not anticipate when the platform was conceived.”
Bottom Line
The upsurge in Zoom stock is losing steam after its turbo-charged run this year. Going forward the sustainability of this rally is very much dependent upon the company’s ability to quickly address users’ privacy and security concerns.
That said, Zoom is thriving on the shift to work-from-home which will continue to grow as consumers and companies adopt more careful communication practices in the post-virus world.
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