Nov 12, 2015 06:00 AM EST

Why Fidelity Investments Should Not Invest In Snapchat After 25% Writedown


Fidelity Investments had reportedly marked down the value of its investment in video messaging application startup, Snapchat, for 25 percent just months after initial investments. Amid the reports, New York University finance professor Aswath Damodaran argued that the company should not invest in high-flying tech startups.

During an interview, Damodaran explained why Fidelity, which usually utilizes its funds to invest in public companies, is out of its depth trying to worm its way into tech startups such as Snapchat and Uber.

"I don't think an outfit like Fidelity has any business being in these spaces," Damodaran said, as per Business Insider. But he also noted that in a valuation perspective, the private and public markets are just the same.

Due to Fidelity's Snapchat write-down, questions about the broader "tech bust," which is reportedly happening in Silicon Valley have surfaced. It also sparked more queries regarding the value of Snapchat.

"The steroid era of startups is over," Damodaran added. "Valuation is about mood and momentum. And mood and momentum can shift overnight."

Snapchat, which famously known to send messages that disappear in seconds, is considered as one of Silicon Valley's most highly valued startups. As of May, the messaging app company was valued at $16 billion, Reuters noted.

Fidelity, however, is reevaluating its stake in Snapchat amid increasing concern in Silicon Valley that some privately funded companies may not live up to their high-rise valuations. According to Bloomberg Business, other startups, including Dropbox Inc., have had their values adjusted downward by mutual funds in recent months. And just a week ago, Square Inc. was reportedly seeking a market capitalization for its initial public offering that was significantly lower than its private-company valuation.

In March, the Fidelity Growth Company Fund and the Fidelity Series Growth Company Fund bought convertible preferred stock in Snapchat. Unfortunately, the stake values Snapchat at $22.91 a share, down from $30.72 a share in previous fund disclosures. At the end of September, the Fidelity Blue Chip Growth Fund owned $15.1 million worth of Snapchat, down from the $20.312 million that was previously disclosed.

As Fidelity becomes the most active investor in privately-held startups, it appears that the investment giant is starting to reconsider the prices it paid just earlier this year. As a matter of fact, Snapchat isn't the only startup in the company's crosshairs. Other companies such as Blue Bottle Coffee was marked down a whopping 43.3 percent, while Dataminr was slashed down by 48 percent and Zenefits has been marked down by 35 percent — all have fared from worse, Fortune reported.

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