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Do Zoom's Privacy Woes Spell Doom for the Stock?

Researchers and law enforcement have slammed Zoom for lax security and privacy measures, but investors are primarily focused on one thing: Paying customers.
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Complaints about Zoom  (ZM)  are piling up, but it's not yet clear what they mean for investors. 

The tech firm and stock-du-jour of the coronavirus pandemic is under scrutiny by law enforcement over lax privacy practices, which surfaced over the past several weeks as remote workers flooded Zoom and other videoconferencing apps. Shares of Zoom closed 6% lower on Wednesday, marking its third consecutive day of declines, amid a broader slide in major market indexes

The New York Attorney General sent a letter to Zoom this week requesting more information on its privacy practices, followed closely by a public warning from the FBI that the software may not be as safe as users assume. 

Recently, reports multiplied of "Zoombombings" -- hackers dropping into Zoom meetings to wreak havoc. Researchers also discovered vulnerabilities in Zoom's Windows app that could allow attackers to steal login credentials; another security expert accused Zoom of employing "shady" practices to gain access to users' devices. 

Zoom was even sued by a man in California for allegedly violating the state's consumer privacy law through a "log in with Facebook" feature. 

Shares are down 14% since trading opened on Monday morning, signaling a pullback on the reports but hardly an exodus from the stock. There's little evidence that security concerns are driving users away en masse, and Zoom shares are still up around 80% in the last two months. 

There's a straightforward explanation, according to Cornelio Ash, an analyst focusing on security stocks at William O'Neil + Co. 

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"Bombing or no bombing, the biggest concern facing Zoom is monetizing the users," Ash said. 

Zoom's videoconferencing software comes in both free and paid enterprise tiers. And the user-friendly nature of the product -- it takes just seconds to set up or join a meeting -- helped it to quickly catch fire among new, homebound users this year. But the core challenge -- and the key question facing investors right not -- is how many casual users it can convert into paying customers. 

On its fourth-quarter earnings call, Zoom executives described a tremendous spike in engagement on Zoom as millions of more people spent time at home. But, according to Zoom CFO Kelly Steckelberg, that surge was mostly on the free side, and that it's "very early to tell whether or not that's going to convert long term into paying customers." 

Zoom's security woes could cause more damage in the long term if there are signs that they're turning customers away, Ash added. But those signs aren't here yet. 

The coronavirus pandemic has meant a baptism by fire for a newly homebound workforce -- as well as for Zoom itself, which has struggled to support a tsunami of new users, many of whom aren't acclimated to privacy features like password protecting a meeting to prevent intruders. And the coming days will make it more clear how much of the chaos around Zoom is improper practices on the part of the company. 

"It's probably the difference between the business client as opposed to the casual retail users that aren’t using [privacy features]. But it remains to be seen to what degree," Ash added. 

Update: Zoom daily users soared to more than 200 million in March from a previous maximum total of 10 million.