Snapchat has made it easier for users to find friends through its new maps feature, but the company itself is having trouble finding formerly friendly faces on Wall Street.
In trading Tuesday, shares for the disappearing photo app company dipped to $15.84 a piece after banking giant Morgan Stanley downgraded shares of the company to the equivalent of “hold.” That deepened losses for investors who bought into Snap’s initial public offering back in March. Those investors had already lost all their investment as of Monday when Snap’s stock dipped below its $17 IPO price for the first time ever.
Morgan Stanley’s downgrade is a particularly hard hit for the company as the bank was an underwriter for Snap’s IPO, guiding the company through the process. Typically, such underwriters become cheerleaders of the company after it officially goes public, authoring “buy” or “hold” recommendations. And Morgan Stanley was no exception.
Following Snap’s IPO, Morgan Stanley gave Snap the equivalent of a “buy” rating and a 12-month target price of $28--one of the most bullish on Wall Street at the time.
But now, the bank has lowered its price target by 43% to $16 a share. That’s well below Snap’s IPO price.
So why the change of heart? According to the note, Morgan Stanley analysts led by Brian Nowak are now less convinced of Snap’s ability to grow. In fact, the analyst effectively refuted the main reasons why Snap’s biggest champions believed in the company at all: its apparent scalability and unique platform.
“We have been wrong about Snap’s ability to innovate and improve its ad product this year (improving scalability, targeting, measurability, etc.) and user monetization,” Nowak wrote. “Snap’s ad product is not evolving/improving as quickly as we expected and Instagram competition is increasing.”
Recently, Snap investors have grown increasingly wary of Facebook-owned Instagram Stories. In late June, the company revealed that it boasted 250 million daily active users--50% higher than the 166 million daily active user base Snap reported in May.
“We believe Instagram has become more aggressive in competing for Snap’s ad dollars,” Nowak wrote.
As a result, Morgan Stanley expects Snap to reach revenue of $897 million this year--far lower than the $1 billion once expected of the giant. Moreover, Morgan Stanley expects the company to reach just 182 million active users by the end of this year.
The Morgan Stanley note also comes just a day after another of Snap’s IPO underwriters, Credit Suisse, lowered their target price on the company, saying that Snap’s stock price is likely to dip even further later this month when Snap’s lockup period begin to expire. That will allow many of Snap’s IPO backers to start selling their shares in the company.
Though Snap still has a chance to wow investors with stronger earnings figures. It’s possible the company is working behind closed doors on a project that could potentially unlock growth. As one user joked on Twitter:
That hot dog is in fact an augmented reality feature that recently hit Snapchat. It bobs, it dances, and it’s now an official meme.
Now if only Snap had a way to capture ad revenue.
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