Zoom stock: Privacy and China connection weigh [Updated]

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This story has been updated to add a statement from Zoom Video on privacy and the connection to China.

One of the few stocks that has benefitted from the coronavirus pandemic is Zoom, although the stock is now under pressure due to privacy concerns. Zoom stock was up more than 100% this year because of its surge in popularity due to the worldwide quarantine and lockdowns. The shares climbed while most of the rest of the U.S. stock market plunged, but the news flow has shifted now.

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Zoom Video stock pressured by privacy issues

Zoom Video Communications Inc (NASDAQ: ZM) stock should not be confused with the stock for Zoom Technologies Inc., which trades under the ticker ZOOM on the over-the-counter market. It seems some have mistaken Zoom Technologies for Zoom Video Communications, as ZOOM stock is up nearly 24% today. However, these same investors may not be in the loop regarding the privacy concerns affecting Zoom Video stock, which is down 6% under the pressure.

Zoom Video stock remains up by nearly 100% year to date, but the privacy concerns have taken a toll over the last few trading days. The company provides video conferencing services, and it has become a household name over the last few months. The lockdowns and quarantines mean most people are staying home or working from home, and Zoom Video has benefited significantly.

However, privacy is a major issue with video conferencing platforms like Zoom, and the company's growing popularity means it is also facing increased scrutiny.

Privacy fallout for Zoom in several areas

The New York Times reported earlier this week that the New York Attorney General's office is investigating Zoom's privacy practices. A spokesperson for the company told MarketWatch that it "takes its users' privacy, security, and trust extremely seriously."

"We appreciate the New York Attorney General's engagement on these issues and are happy to provide her with the requested information," the spokesperson added.

One other problem with Zoom is that the company said it utilizes end-to-end encryption. However, after research by The Intercept, it was forced to admit that it actually doesn't, at least not in terms of how that phrase is generally understood. In fact, end-to-end encryption isn't even possible with Zoom conferences.

The platform actually uses transport encryption using TLS connections, which is the same encryption used for securing HTTPS websites. The key difference between end-to-end encryption and transport encryption if that end-to-end encryption were used, Zoom itself wouldn't be able to see and hear the video and audio content that's being exchanged. The data would be encrypted, and the company wouldn't be able to decrypt it.

However, the use of transport encryption does enable the company to listen in, although it claims that it actually doesn't do that.

Beware of Zoom-bombing

One other major privacy problem Zoom is dealing with is something now called "Zoom-bombing." Business Insider reported that trolls were breaking into Alcoholics Anonymous meetings held using the video conferencing platform. They then made rude comments, saying things like, "Alcohol is soooo good."

Schools also face the problem of Zoom-bombing. The FBI office in Boston issued a warning about the problem after trolls broke into video conferences held by two schools. To break into meetings, trolls scour the internet looking for meeting IDs.

Zoom urges users to ensure they have the maximum privacy settings in place. For public meetings involving large groups, the company advises hosts to make sure the setting allowing only the host to share their screen is enabled.

Zoom was leaking data to Facebook

One other huge privacy problem Zoom has been dealing with involves Facebook, which attracted a lot of scrutiny due to its own data leaks. Motherboard discovered that the platform was leaking information to Facebook through the iOS version of its app—even for users who don't have Facebook accounts. Zoom didn't even inform users that it was sending analytics to Facebook in its privacy policy.

The app notified Facebook whenever it was opened and provided information about the user's device, like the model, the time zone they were in and the city they were using it from. Other leaked data include the user's mobile carrier and the unique advertiser identifier, which is used by online companies to serve up targeted digital ads.

After Motherboard's report about the Zoom privacy leak involving Facebook, the company admitted in a blog post that it was sharing data. CEO Eric Yuan said they "were made aware" that it was happening last week after Motherboard's report. The platform then made some changes to put a stop to the leak, but the damage has been done.

According to CBS News, the company now faces a lawsuit in California in connection with the Facebook leak.

Connection with China

As if the other privacy issues involving Zoom weren't enough, some users may be shocked to hear about the company's close connection with China. CNBC reported last year that one of the company's main profit drivers was the fact that its engineering team is located in China. Hiring staff in China enables Zoom to keep its personnel costs low.

Yuan is a China-born American, so it isn't a huge surprise that he would look to China to help keep expenses low. However, the company acknowledged in its IPO filing that having its staff located in China could pose a risk because it may expose it to increased scrutiny. Most of Zoom's customers are business customers, who are more sensitive about data privacy.

Thus far, not much has been said about Zoom's connection to China despite the security concerns it causes.

Zoom responds to questions about China connection

After this article was published, a Zoom spokesperson reached out with this statement on the connection to China:

“Zoom takes user privacy and security extremely seriously. Zoom’s system is designed such that only minimal information is collected and any information and/or data transiting the system is routed through a data center in geographic proximity to where the host’s enterprise account is provisioned. We have 17 of our own data centers around the world, only one of which is in China. We also use public cloud datacenters globally, predominantly through AWS.

"As such, data originating in the U.S. stays in the U.S., and cross-border meeting data goes to wherever the host’s enterprise account is headquartered. For example, if employees from a global company headquartered in the U.S. join a meeting, and participants join from both the U.S. and China, any data related to that meeting will stay in the U.S., even if the meeting ‘host’ is in China.

"Zoom’s employees based in China do not have clearance or the ability to access content held outside of China. Zoom’s policies regarding compliance with valid legal process preclude cooperation where a government does not have jurisdiction.”

Zoom stock rated a Sell by Goldman

Aside from the privacy issues affecting Zoom stock, a bearish report from Goldman Sachs may also be having an impact. Analyst Heather Bellini set her price target at $80 per share and rates it a Sell. She believes the shares soared too high, too fast.

She warned that many of the company's customers are small- to medium-sized businesses, which will likely be more affected by the coronavirus outbreak. Thus, she believes that even though Zoom could pick up new customers due to the pandemic, it might lose a lot of business due to the outsized impact on small- to medium-sized businesses.

Between these two impacts, she does expect to see Zoom's revenues increase by about 61% this year. The problem is that at the price Zoom stock was trading at, it was selling at a multiple of more than 1,600 times trailing earnings.