Snap Inc. (NYSE:SNAP) has had salt rubbed into its wounds with Morgan Stanley downgrading the owner of Snapchat, a day after its shares fell below their initial public offering price.
Morgan Stanley cut its rating to ‘equal weight’ from ‘overweight’ and lowered the price target to US$16 from US$28 in a note to investors today.
The investment bank took Snap public on 2 March so the downgrade creates a rather awkward situation.
Snap’s shares closed at US$16.99 yesterday, below its IPO price of US$17.
In US pre-market trading, the shares descended a further 3.69% to US$16.38 following the Morgan Stanley downgrade.
Morgan Stanley highlights worries about Snap's ad product
"Snap's ad product is not evolving/improving as quickly as we expected and Instagram competition is increasing," said Morgan Stanley analyst Brian Nowak.
"We have been wrong about Snap's ability to innovate and improve its ad product this year (improving scalability, targeting, measurability, etc.) and user monetisation as it works to move beyond 'experimental' ad budgets into larger branded and direct response ad allocations."
The company’s shares have been under pressure since reaching a high of US$24.44 a day after it started trading.
Morgan Stanley’s analysts reviewing the business are separate from the underwriters that led the IPO. However, it is unusual to see the research unit of an underwriter firm turn negative on a stock so soon after an IPO.
Share price decline suggests waning confidence in Snap
Snap is not the only social media company to see its shares trade below its IPO price. The same thing happened to both Facebook and Twitter.
However, investors fear the share price decline suggests waning confidence in Snap’s ability to deliver on its targets to increase usage and ad sales in coming years due to competition from Facebook-owned Instagram.
Snapchat currently has 166 million daily users of its mobile phone app, which includes short photo and video messages that automatically delete after viewing.