Is it sanity or is it the beginning of a bloodbath? Morgan Stanley has marked down its stake in Indian e-commerce company Flipkart to $103.97 per share, 27 per cent below the price of its last fundraising round. Last year, Morgan Stanley had valued Flipkart’s per share little over $142 per share. Importantly, the markdown comes just a week after Flipkart’s claimed that it’s valued $15.2 billion. The fall in share reduces Flipkart’s valuation to $11 billion.
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Lowering valuation of Flipkart hasn't come as a shocker to industry observers. Market observers have been anticipating correction in valuation of privately held Internet companies. Mohandas Pai, ex-Infosys Board Member and founder of Aarin Capital, says:
These downgrades will happen in e-commerce till there is proper business model. The euphoria of fundraising at high valuations have to come to some reality and the current model of business is unviable because of the discount led model and high returns.
As per SEC filing, Morgan Stanley valued its Flipkart stake at $58.93 million in December 2015, as compared to $80.62 million in June 2015. While some see this mark down as only a modest one, analysts forecast that the implications will be bigger for other e-commerce companies as not many can digest a 25 per cent markdown (see this Twitter thread).
Interestingly, Flipkart’s rival Snapdeal witnessed a 30 per cent upward swing in its valuation when it raised $200 million recently. The Gurgaon-headquartered company is reportedly valued in the range of $6.5-$7 billion. The valuation of ShopClues also jumped significantly and it became the fourth Unicorn in the fledgling e-commerce market.
Satish Meena, Senior Analyst at Forrester Research, says:
Not many players in Indian eCommerce can digest a 25 per cent markdown. Flipkart's valuation markdown will have consequences for others as everyone is riding on the same boat and valued based on the GMV number which is neither transparent nor correct but highly over stated.
Besides Flipkart, Morgan Stanley also marked down shares of Palantir, a SaaS-based data analytic platform by 32 per cent, shares of Dropbox by 25 per cent, and those of Airbnb by 10 per cent.
Morgan Stanley reportedly uses multiple valuation methods for most of its private tech portfolio, including a 20 per cent discount for lack of marketability when using market comparable companies.
A few financial experts opine that investors in Flipkart, Snapdeal and others would look to exit from these companies in the course of next two to three years (given their fund cycle and obligation/commitment with limited partners).
"I believe that investors at some point are going to ask questions about e-commerce because certain funds will exit in three to five years. But the opportunity for the business in India is only going to grow," says R Natarajan, CFO of Helion Ventures.