Zoom Should Get Benefit of the Doubt on Privacy Concerns by Investors

Zoom's spending on privacy and security is the line item to watch in upcoming earnings reports.
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For work-from-home darling Zoom, the bad headlines keep rolling in. But investors should avoid getting too rattled, at least for now.

Over the weekend, the New York Department of Education became the first major educational agency to ban Zoom in favor of Microsoft  (MSFT) - Get Report Teams, citing privacy concerns. Zoom  (ZM) - Get Report was also reportedly banned by Elon Musk’s SpaceX amid widespread reports of vulnerabilities and hacks.

Zoom stock closed 4.10% lower on Monday at $122.94.

Zoom’s CEO Eric Yuan apologized for the privacy and security flaws in the app, and the company has worked swiftly to patch certain vulnerabilities and introduce new privacy tools. He also told CNN in a recent interview that the company has learned a lesson and will “double down, triple down on privacy and security” going forward.

Shares of Zoom are off more than 20% from its all-time high of $164.94 on March 27, but have nonetheless gained 78% so far this year as one of the superstar stocks of the coronavirus pandemic.

On security and privacy concerns, investors should give Zoom “the benefit of the doubt,” for several reasons, said RBC Capital Markets analyst Alex Zukin.

One is that, despite high-profile announcements like that of New York's school district, the risk of paying customers bailing en masse "is fairly low," Zukin said. 

As many observers have noted, Zoom’s free version is a lightweight consumer product that morphed into an enterprise product -- by default and practically overnight -- as millions of people were suddenly sent home. And many of the reports on lax privacy could be attributable to a lack of awareness of Zoom’s privacy features by users who are new to the app.

“This is a company that is leaned in to do the right thing; the CEO is focused on the humanity aspect and not monetization aspect of this...they could have enacted a paywall immediately and not have had this come up at all,” Zukin noted.

Zoom said on a shareholder call in March that the large majority of its coronavirus-related traffic surge was from people using the free tier, but that it was too soon to make predictions on how many could convert into paying users.

Zoom reported on April 2 that its number of daily users soared to 200 million throughout the pandemic, from a previous maximum total of just 10 million.

For now, investors appear largely inclined to overlook the privacy concerns -- while also keeping a close eye on what expenses are associated with efforts like managing traffic and fixing privacy holes.

In early March, Zoom management cautioned that because of the traffic surge, its gross margins will fall at the “lower end of our long term target of 80% to 82%,” said Zoom CFO Kelly Steckelberg.