Morgan Stanley Helped Bring Snap Public But Now Sees Further Downside To Stock

Shares of Snap Inc SNAP traded below its initial public offering price of $17 for the first time ever and closed at $16.95 Monday. But shares were trading lower by another 3 percent early Tuesday morning, in part due to a downgrade by analysts at Morgan Stanley.

Morgan Stanley bankers played a vital role in bringing Snap public, but now the firm's equity research team downgrades the stock Overweight to Equal Weight with a price target slashed from $28 to $16. Granted, there is a Chinese wall that separates the investment banking division from equity research, but the downgrade nevertheless "creates an awkward appearance," CNBC noted.

Why A Downgrade?

Snap's Ad Products aren't living up to expectations and taking longer to evolve than expected, Morgan Stanley's Brian Nowak noted in the downgrade report. In fact, the analyst acknowledges he was wrong about his prior view that Snap will innovative and improve its ad products in 2017.

Meanwhile, Snap's user growth trends are also coming in weaker than expected and Facebook Inc FB's Instagram property has become more aggressive in competing for advertisers attention, the analyst continued. This should impact Snap's revenue growth and the analyst lowered his 2017 revenue expectation from $945 million to $879 million and 2018's revenue estimate was also lowered from $1.925 billion to $1.679 billion.

Nowak also lowered his 2017 daily active user estimate from 185 million to 182 million and next year's outlook from 204 million to 198 million.

4 Challenges

Nowak's industry conversations and checks indicates four larger than expected challenges Snap faces, including:

1. Advertisers are realizing a lower ROI, which is preventing incremental ad spends.
2. Snap's ad ROI measurability hasn't improved as much as hoped.
3. Snap's self-serve automated bidding platform isn't scaling as quickly as expected.
4. Instagram's status as a disruptor now appears to be more worrisome than previously expected.

At time of publication, shares of Snap were down 5.35 percent at $16.10.