The COVID-19 pandemic has created insane surges in usage for a wide range of communications platforms. Zoom Video Communications (NASDAQ:ZM) has emerged as a poster child for videoconferencing as companies shift many of their employees to working from home. Soaring usage of the platform has uncovered critical vulnerabilities in privacy and security, which the company is now scrambling to address.

In a blog post earlier this month, CEO Eric Yuan noted that Zoom hit 200 million daily meeting participants in March -- or 20 times the prior maximum daily meeting participants of just 10 million. Meanwhile, investors have been flocking to the stock, sending shares up over 140% year to date at the peak before starting to pull back.

Person in a Zoom video conference

Image source: Zoom Video.

Can Zoom monetize its surging usage?

Credit Suisse analyst Brad Zelnick just downgraded Zoom shares from neutral to underperform and assigned a price target of $105. While appreciating Zoom's role in mitigating the crisis by providing tools for consumers to stay in touch with loved ones and facilitating remote work collaboration, the company's valuation has soared commensurately with its stock price.

"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," the analyst wrote in a research note to investors.

His biggest concern is valuation, as shares are now trading around 40 times 2020 estimated revenue, according to Zelnick. For reference, many other popular enterprise software and collaboration companies of comparable size fetch price to-sales multiples of around 20, which is already a rich valuation level. Investors are pricing in high expectations surrounding the surge in engagement, but it's important to remember that Zoom may not be able to monetize all of that usage.

On the fourth-quarter earnings call a month ago, CFO Kelly Steckelberg cautioned that it was "very early to tell whether or not that's going to convert long term into paying customers." Many of the new users are using Zoom's free tier, but the company still has to bear the costs of expanding service capacity to meet the demand while hoping that it can convert some of those users. That's partially why Zoom expects gross margin this fiscal year to be lower than its long-term target of 80% to 82%.

Like many modern tech companies, Zoom leverages third-party cloud infrastructure providers like Amazon Web Services and Microsoft Azure, which complement its own roughly dozen co-located data centers.

The market is now pricing in an extremely optimistic outlook regarding the conversion of free users to paid customers, Credit Suisse argues. The analyst does believe that the public health crisis will catalyze adoption of video communications at large, but also notes that trend will invite more competition as well.