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Snap shares fall nearly 9% after downgrade by Morgan Stanley, a rare rebuke by a firm that helped bring it public

  • Morgan Stanley downgrades Snap stock to equal weight from overweight and slashes its price target to $16 from $28.
  • For the first time, Snap shares closed Monday below their $17 IPO price, which Morgan Stanley helped set.
  • The shares closed 8.95 percent lower.

Morgan Stanley analysts downgraded Snap on Tuesday, a day after the shares fell below their IPO price of $17.

This is particularly insulting because Morgan Stanley took the Snapchat parent public, and therefore priced the IPO at $17 a share. The analysts are separate from the underwriters, but it still creates an awkward appearance.

Shares of the social media company closed 8.95 percent lower at $15.47 a share after the call. A team lead by analyst Brian Nowak downgraded the stock to equal weight from overweight and slashed their price target to $16 from $28.

"SNAP's ad product is not evolving/improving as quickly as we expected and Instagram competition is increasing," Nowak said in a note to investors.

"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 as it works to move beyond 'experimental' ad budgets into larger branded and direct response ad allocations."

These are the same concerns that caused Snap shares to close at $16.99 on Monday. The shares reached a high of $29.44 a day after its March 2nd debut but have been under pressure ever since.

The research and investment banking arms of all major Wall Street banks are technically separate units and barred from working together. One can even argue the negative call Tuesday is how independent research on Wall Street is supposed to work.

Still, it's rare to see the research unit of an underwriter firm throw the towel this early after an IPO.

Snap has a very negative Wall Street outlook for such a young stock. Eighteen analysts call it hold or a sell and 11 recommend buying the stock, according to TipRanks.com.

Nowak also cut his revenue forecasts for Snap and doesn't expect the Snapchat parent to turn a profit through at least 2020. Previously, the Morgan Stanley analyst expected Snap to report positive earnings before interest, tax, depreciation and amortization of $406 in 2020.

No profits expected through year 2020

Source: Company reports, Morgan Stanley Research

Facebook-owned Instagram's growth is a major factor behind the Morgan Stanley Snap downgrade.

"We believe Instagram is likely to be more disruptive than previously expected as our industry conversations indicate that Instagram is giving advertisers sponsored lenses for free," Nowak said.

He also noted that the number of Instagram app downloads "appears to be holding up/growing much better" despite a decline in Facebook app downloads. Meanwhile, Snap's efforts to increase iOS alerts, "in our view, speaks to an increased need to drive growth," Nowak said.

Nowak still thinks the young firm has potential. He pointed out users spend a "strong" more than 30 minutes a day on Snapchat, and that the firm is developing in four key areas: ad creative, buying, measurement and user engagement.

With reporting by Michael Bloom and Evelyn Cheng.

Disclosure: CNBC parent NBCUniversal is an investor in Snap.

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