Why Zoom Video (ZM) Deserves More Time Amid Growing Pains

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When the worst thing you can say about a company is that “it’s growing too fast,” that’s usually a good sign that you’ve come across a pretty good investment. And I think Zoom Video Communications (ZM), which saw its stock plunge as much as 15% Monday, falls into that category.

Zoom offers an easy-to-use, high-quality video-conferencing platform that works reliably, compared to those of larger competitors, including Microsoft (MSFT) and Cisco (CSCO). But can the company, which has suffered through a litany of negative headlines related to privacy and security, mature fast enough for a skittish market that is ready to punish anything?

Zoom shares have taken a brutal beating over the past several weeks, falling from an all-time high of $165 to Monday’s low of $108, or about 35%. While the stock did close off the lows Monday at $122.94, it is still down 26% from its high. Credit Suisse analyst Brad Zelnick on Monday cut his rating on Zoom stock to from Neutral to Underperformance

“We commend Zoom for being a superhero of the current health crisis, though our responsibility as equity analysts compels us to distinguish great companies from great stocks,” Zelnick wrote, though he raised his target price to $105 from $95. “Encryption concerns have already caused some high-profile customers to curtail Zoom usage…and we expect others could follow, though the majority of organizations likely have no issue,” he added.

Zoom soared in popularity as states started to impose stay-at-home restrictions to combat the current health crisis. The company’s collaboration and video conferencing tools enabled businesses and employees to work from home. Recognizing the tremendous need, Zoom offered up its tools and services to K-12 schools, universities, hospitals and several local and state governments as a substitute for in-person contact.

In effect, not only did the term “Zooming,” as in “Googling,” became a thing, people began developing other use cases for it, including yoga classes and virtual cocktail hours. However these new uses cases spawned the term “zoombombing,” where trolls crash the meetings to disrupt the conferences with insults, also became a thing. This is because software was designed for the enterprise user and was being used as a social networking platform.

Privacy and encryption concerns have caused some high-profile customers to stop using Zoom, including New York City Schools. Zoom CEO Eric Yuan has not ducked the criticism. He’s admitted the company has fallen short and has accepted responsibility, telling the Wall Street Journal on Friday he “really messed up” on security. He’s also given several interviews promising to fix the security flaws and restore the company’s reputation.

I see this pullback as a solid buying opportunity. The company last month reported more than 200 million daily active users, compared to just 10 million at the end of December. I like the fact that Zoom, which has $855 million of cash on the balance sheet, is working quickly to improve its security capabilities and expect its meetings service to benefit from a long-term shift towards working from home even as the pandemic passes.

Indeed, the company has made some mistakes amid its growth spurt, which has caused several investors to run for the exits. But it deserves time to mature.

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