Credit Suisse Downgrades Coronavirus Winner Zoom (ZM)

Most stocks have taken a pounding in the midst of the massive—and some would say wildly indiscriminate—coronavirus sell-off. However, some stocks have proven to be surprising winners of an environment where somewhere around a third or better of the United States economy has been shut down. One of these surprising beneficiaries of the disaster was Zoom (NASDAQ: ZM), who focused on video conferencing tools. Now, however, word from Credit Suisse says that Zoom's days of speeding forward may be numbered, and the company has downgraded the stock from “neutral” to “underperform”.

Right Place, Right Time

Zoom benefited from some of the most unusual circumstances the working world had seen in years, maybe even decades. A worldwide pandemic broke out, forcing the closure of scores of businesses. This left anyone who could work from home almost frantically encouraged to do so, in a bid to keep businesses at some semblance of being open.

It wasn't just businesses, either; schools, churches, healthcare, and pretty much any model that depended on large numbers of people in the same room to exist turned to online alternatives to get the job done, and Zoom was a major beneficiary of that turn. That led to Zoom reaching record highs back in March.

The Bloom Off the Rose

However, as is so often the case with sudden success stories, a look under the hood suggested potential trouble spots. While Zoom was indeed providing valuable video conferencing services for its customers, there were concerns about the company's policies on data privacy, something that's absolutely crucial whenever proprietary information is involved. That left investors feeling a little gun-shy and poised to take profits, over to other vendors.

That's part of what led Credit Suisse to undercut Zoom's rating, but just part. That there was a multi-pronged reason to make the cuts might actually be worse news for Zoom.

While Zoom had the benefit of being in the right place at the right time with the right product, it was a safe bet that competitors weren't going to give Zoom that first-mover advantage for very long. Just recently, the New York City Department of Education, for example, noted that teachers should make the move to Microsoft Teams instead of Zoom. Given that Microsoft Teams' user counts doubled in March, it makes it clear that Zoom's gains aren't the result of Zoom's superior product, but rather a much greater demand for what Zoom does in general.

Worse, Zoom had massive growth, but potentially quite the wrong kind. Credit Suisse noted that the surge in user count was likely to end up being largely “ephemeral”, as most of Zoom's new users came in as free users, or in education circles. These users are especially hard to actually convert to paying users, especially once the crisis fades away.

Uh Oh....

Just to round things out, and put a truly disturbing cherry on top of an already calamitous cake, reports from last week suggest that two separate US state attorneys were already gathering information from Zoom over concerns about privacy and security of information. While that may not actually turn into anything seriously detrimental to Zoom, just the occurrence is likely unnerving enough to potential users to find an alternative.

Indeed, alternatives are already available, and with this pandemic still in play, will likely be explored thoroughly in the weeks and months to come. The value of remote work has asserted itself plainly throughout this entire disaster, and companies who had their bottom lines saved from utter disaster by being able to put telecommuting to work are likely starting to consider just where this phenomenon can be further used. Further, it's a safe bet that workers at companies that formerly wouldn't consider remote work are now eager to keep this new perk for their own use rather than solely to save the company.

The benefits of remote work are substantial; it improves morale and allows businesses to reduce expenses on physical operations by shifting them to remote. As more businesses discover the value, they'll be needing the tools to make it happen properly. Zoom, however, is looking like it may be considered less often going forward than it was now, a point that will likely hamper its meteoric rise in the future.