Can Zoom Video Communications Counter This Chinese Tech Giant?

Shares of Zoom Video Communications (NASDAQ: ZM) have surged more than 75% this year as the COVID-19 pandemic boosted usage of its videoconferencing and remote collaboration tools. However, Zoom also faces a growing list of fierce competitors, including Cisco‘s (NASDAQ: CSCO) Webex, Microsoft (NASDAQ: MSFT) Teams, and Tencent (OTC: TCEHY) Meeting.

Tencent Meeting, known as VooV Meeting outside of China, is newer than Zoom, Webex, and Teams, but it’s already gained over 10 million daily active users since its launch last December. Tencent launched the app in over 100 countries and regions in March, and the UN selected it to host a “global dialogue” to commemorate the organization’s 75th anniversary on June 26.

A woman chats with four other people on a video chat platform.

Image source: Getty Images.

VooV is still tiny compared to Zoom, which grew its daily active users from 10 million to 200 million between December and March. However, VooV could still have a lot of room to run, especially with the support of Tencent’s other services. Zoom has also been struggling with numerous privacy and security concerns, and those missteps could give Tencent an opportunity to catch up to the market leader.

How Tencent could cause headaches for Zoom

Tencent’s WeChat, which serves 1.16 billion monthly active users, is the largest mobile messaging platform in China. According to recent estimates, WeChat hosts over two million Mini Programs, which allow users to access other services — including e-commerce marketplaces, payments, games, and more — without leaving the app. It also owns the older messaging app QQ, which still reaches 647 million mobile monthly active users. That massive audience could be an easy launch market for VooV.

Tencent can easily support millions of video streams with its own infrastructure. It owns the second-largest cloud infrastructure platform in China, and it’s expanding that network overseas. It already owns data centers in the U.S., Canada, Germany, Singapore, and India — and storing user data on those servers might allay some concerns about Tencent’s relationship with the Chinese government. On its support website, Tencent emphasizes that its cloud services in “different regions cannot communicate with one another over private networks.”

As one of the largest tech companies in China, Tencent has more experience with enterprise-level security than Zoom — which recently admitted that its video chats weren’t fully encrypted, that it accidentally routed streams through Chinese servers, and that it shared some user data with Facebook. Some Zoom streams were also hit by “bombs”, in which uninvited attendees flooded meetings with offensive content.

Those failures could nudge Zoom’s users toward services like VooV, Webex, and Teams, which are all run by more experienced tech companies. Zoom’s revenue surged 88% last year, but the stock is richly valued at roughly 55 times sales. It could struggle to justify that premium valuation if it doesn’t address its security issues and counter its competitors.

But is Tencent’s VooV a major threat?

Tencent has plenty of clout and cash, but its close ties with the Chinese government could also prevent VooV from gaining much momentum overseas, regardless of its assurances regarding its overseas data centers.

A Chinese flag superimposed on a circuit board.

Image source: Getty Images.

Tencent regularly censors WeChat conversations and disables user accounts in China at the government’s behest, which cuts citizens off from their digital identification, healthcare, and payment services. Chinese users also can’t sign up for new WeChat accounts without providing their national ID numbers — which makes it easier for authorities to track their online behavior.

Tencent’s other actions indicate it’s subservient to the Chinese government. It launched a “clapping” game to applaud President Xi’s Party Congress speech in 2017, reskinned PUBG Mobile as a “patriotic” version dubbed Peacekeeper Elite last year, and suspended its NBA broadcasts after Houston Rockets general manager Daryl Morey expressed his support for protesters in Hong Kong. Its movie production unit, Tencent Pictures, often forces overseas studios to scrub their films of “controversial” content.

China rewards Tencent for its compliance. The government put the tech giant in charge of the country’s digital healthcare efforts in 2017, honored founder and CEO Pony Ma as a top entrepreneur in 2018, and likely persuaded the UN to use VooV at its upcoming anniversary dialogue. That tight-knit relationship could make VooV a much less appealing option than Zoom, Teams, or Webex for overseas users.

The key takeaway

VooV probably won’t throttle Zoom’s growth on its own. However, VooV is yet another brick in a wall of competitors that could eventually overwhelm Zoom if it doesn’t resolve its privacy and security issues soon. The COVID-19 pandemic thrust Zoom into the spotlight, but it still hasn’t proved that it can stay ahead of its more experienced competitors over the long term.

Find out why Zoom Video Communications is one of the 10 best stocks to buy now

Motley Fool co-founders Tom and David Gardner have spent more than a decade beating the market. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.*

Tom and David just revealed their ten top stock picks for investors to buy right now. Zoom Video Communications is on the list — but there are nine others you may be overlooking.

Click here to get access to the full list!

 

*Stock Advisor returns as of March 18, 2020

 

Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to its CEO, Mark Zuckerberg, is a member of The Motley Fool’s board of directors. Leo Sun owns shares of Cisco Systems, Facebook, and Tencent Holdings. The Motley Fool owns shares of and recommends Facebook, Microsoft, Tencent Holdings, and Zoom Video Communications and recommends the following options: long January 2021 $85 calls on Microsoft, short January 2021 $115 calls on Microsoft, and short May 2020 $120 calls on Zoom Video Communications. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

Leave a Comment

Your email address will not be published. Required fields are marked *