Description

“Buy the rumor, sell the fact.” — Unknown speculator

Here I’m going to recommend a trade that follows the exact reverse of the above dictum. Short ZM at $113/share. (Friday’s close is $128 but the price has dropped as I check this morning. So I’m using $113 which is likely where people can actually execute the short.)

I believe everyone knows about Zoom in this coronavirus pandemic time. Zoom (ticker ZM) is a company providing cloud based video conferencing services. Here are the basic facts:
(1): During fiscal 2019 it has total revenue of $622.6M, operating profit of $12.7M, and current market cap of $35.7B. Obviously people are thinking about entirely different numbers now due to the coronavirus usage surge. But as the virus fade and usage back to some higher normal, ZM is trading at very exorbitant price by any measure; unless you think it’s going to have 40% growth for many years to come as most growth investors think it will.
(2): There are numerous video conferencing services out there. Just google “video conferencing” you will see gotomeeting, avaya, voyage, and many others, together with zoom. Video conferencing is NOT something that inherently has network effect. It’s mostly used by employees of the same organization to hold remote conferences. If a company or government enterprise decides to switch to another service, it can do so without much friction. There is no such thing like: many people in other companies are using zoom so we must also use zoom.
(3): This third point is why I want to short ZM now. There was a report last week showing zoom is sending critical information to its servers in China; and zoom admitted it (saying that it’s done by mistake. which clearly is not as the details show). I think this link has the earliest story: https://citizenlab.ca/2020/04/move-fast-roll-your-own-crypto-a-quick-look-at-the-confidentiality-of-zoom-meetings/ If organizations begin to believe, or merely suspect their data being sent to China by Zoom; they will surely move away from Zoom quickly. Government organizations might even issue ban on using it in certain national security sensitive places.
(4): In the current environment, any claim remotely hinting companies facilitating Chinese government espionage in US would invite serious scrutiny. I believe there will be a serious investigation. Regardless of investigation outcome, investors will soon move from “growth” to “wait and see” mentality.

Key points and some analysis of that report.
(1): Zoom claims that it’s using AES-256 encryption algorithm; while in reality, it’s using AES-128 (much less secure) everywhere.
(2): The AES-128 key is generated by Zoom server and send to participants through servers in China.
(3): Zoom owns three companies in China having more than 700 employees. This arrangement is obviously designed to get “cheap labor arbitrage” from China. As a result, it allows Chinese government to pressure Zoom to reveal useful customer data/information. You might call me conspiracy theorist, but I think this is the reason why Zoom is sending decryption keys to servers in China.
(4): Zoom is ONLY sending encryption/decryption keys to Chinese servers; not the actual conference content. This makes it very difficult to detect based on simple internet packet analysis; and I believe it’s totally incompatible with Zoom’s claim of “sending to china by mistake”. Why did it only send decryption keys? Why no conference content was mistakenly sent?

Based on this; I think at least one of the following two will happen:
(1): There will be an investigation scaring away users and investors.
(2): If the investigation finds the above “intentional” hypothesis to be true; it would be the end of zoom as we know it.
(3): Even if the investigation draws long without clear conclusion, investors’ mentality will still change to be more cautions dropping its multiple significantly.

This report is short and kind of incomplete because I want to finish it before today’s market open so that people can have time to respond.

Catalyst

people realize that their privacy/security might be compromised at zoom