A storm is coming around Zoom Video Communications (NASDAQ :). After more than doubling in value this year, the shares of this teleconference provider are falling rapidly as consumers and regulators raise concerns about privacy and security.
The reaction against Zoom increased last week as millions of workers and students flocked to digital communications providers after the coronavirus pandemic forced countries to lock up their citizens. In March, daily Zoom users rose to over 200 million from the previous peak of 10 million, the video conferencing app reported on Wednesday.
Weekly price chart for zoom video communication
But that wave also exposed 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 on a large scale after receiving two reports from unidentified individuals that invade school sessions, a phenomenon known as & # 39; zoombombing & # 39 ;.
A few 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 has also been sued by a user alleging that the video conference service unlawfully discloses personal information. The company collects information when users install or access the Zoom application and shares it without proper notice to third parties, including Facebook Inc (NASDAQ :)., According to the lawsuit filed with federal court in San Jose, California on Monday. In addition to the user case, the New York Times reported that the company is being scrutinized by the New York Attorney General.
Flurry of Negative Developments
Amid a wave of this negative publicity surrounding the company's privacy practices, Zoom's share has lost 35% of its value since it hit a record high of $ 164.94 on March 23. which raised questions about the long-term appeal of the stock and the severity of privacy issues. The stock closed at $ 121.93 on Thursday, down 11% during the day.
The latest developments certainly increase the pressure on the company to quickly resolve its privacy issues and free the application from intruders, 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.
Therefore, despite these setbacks, some analysts still see value in Zoom, which has become the standard definition for video conferencing.
Sanford C. Bernstein analysts said in a note quoted by Bloomberg that they continue to recommend purchasing Zoom as acceptance by paid users has increased dramatically. Bernstein cited a recent survey he conducted among working American adults, which found that "anywhere from 7 to 20 percent pay for a Zoom plan for personal use," a trend that could add "a few hundred million" to the full annual turnover.
Zoom said last month that the full year should be $ 905 million to $ 915 million, a jump of at least 45% over the previous fiscal year.
Separately, RBC Capital Markets raised its price target from $ 110 to $ 125, citing data demonstrating an increase in downloads for Zoom & # 39; s app.
While addressing these concerns, Zoom said the company is deploying the resources necessary to proactively identify, address, and resolve problems in the next three months.
"We recognize that we do not live up to the expectations of the community – and our own – privacy and security," founder and CEO Eric Yuan wrote in a letter to Zoom users on Wednesday. "We now have a much wider group of users who use our product in a variety of unexpected ways, posing challenges that we had not anticipated when the platform was conceived."
Bottom Line
The revival of the Zoom stock is losing steam after this year's turbo run. In the future, the sustainability of this rally will depend heavily on the company's ability to quickly address users' privacy and security concerns.
That said, Zoom thrives on the shift to working from home, which will continue to grow as consumers and businesses communicate more carefully in the post-virus world.
