Instinet initiated coverage on Snap with a reduce rating, saying future financial results will likely disappoint investors. The firm was the second on Wall Street to initiate on the hot IPO with a sell rating following Pivotal Research Group earlier Thursday.
"Snap Inc. is becoming a public company just as its user growth and monetization growth rates are beginning to meaningfully slow," analyst Anthony DiClemente wrote in a note to clients Thursday. "We see Snap's revenue opportunity as constrained relative to expectations and, as such, we think shares are fairly valued at best at the IPO price."
Snap shares are up more than 50 percent midday Thursday from its $17 IPO offering price.
Diclemente, a veteran media analyst who worked for Barclay's prior to Instinet, cited four key reasons for his negative stance:
"1) Already slowing growth in daily active users (DAUs) 2.) Slowing monetization (ARPU) [average revenue per user] growth 3.) Fierce competition from larger rivals such as Facebook, Instagram, and WhatsApp 4) Rich valuation relative to current and future growth"
DiClemente started his Snap price target at $16, representing nearly 40 percent downside from midday trading levels. Even at his price target, he said it would trade at a "lofty" 11 times enterprise value to sales valuation multiple.
Snap's quarter-on-quarter user growth slowed to 7 percent and 3.3 percent in the 2016 third and fourth quarters, respectively, down from 14 percent and 17 percent growth in the first and second quarters, respectively, last year, DiClemente noted.
"We believe much of the slowdown is being driven by increased competition, i.e., the launch of Instagram Stories in August 2016. A slower user growth trajectory in the present naturally limits upside in Snap's revenue generation in future years," he wrote.
Three analysts in total have rated Snap so far. Pivotal and Instinet with sell ratings and Aegis Capital with a hold rating. Bigger banks who helped in the underwriting of Snap's IPO are barred from issuing research for a period of time after the offering.
— CNBC's Michael Bloom contributed to this story.