Snap Slips Below IPO Price, Gets Downgraded by Morgan Stanley

(Bloomberg) -- Snap Inc. fell below its initial public offering price for the first time and was downgraded by Morgan Stanley amid concerns over competition from Instagram and the ability of Snapchat’s parent to grow as fast as initially expected.

The stock closed down 1.1 percent at $16.99 in New York on Monday, below the $17 IPO price set on March 1. It was down 4.2 percent to $16.27 in premarket trading Tuesday.

Morgan Stanley analyst Brian Nowak said the company’s ad products are taking longer to improve and evolve than previously expected.

“We have been wrong about Snap’s ability to innovate and improve its ad product this year,” Nowak wrote in a note to clients Tuesday. “Instagram has become more aggressive in competing for Snap’s ad dollars.”

As a result, Nowak said he expects to see Snap’s ad revenue growth being slower than previously expected. The firm is cutting its 2017-2018 revenue forecasts by 7 percent to 13 percent. Nowak lowered his recommendation on the stock to equal-weight from overweight and cut the price target to $16 from $28. Morgan Stanley was an underwriter on the Snap IPO.

In its IPO, Venice, California-based Snap drew investors who were enthusiastic about a company popular with young people for sending fun photo and video messages that disappear, and it was intriguing to advertisers who want to reach that elusive audience. But in May when the company reported its first quarterly earnings, revealing slower user growth in the period, Snap’s stock tumbled 26 percent. The results were a sign that Facebook Inc.’s strategy of copycatting virtually every feature of the Snapchat app was taking a toll.

To regain value, Snap will need to prove that its advertisements are a must-buy, not just an experiment, and will need to keep innovating on its product, analysts have said.

Snap isn’t alone among technology shares coming under increasing analyst scrutiny. Many large tech stocks, including Facebook, Apple Inc., Nvidia Corp. and Microsoft Corp., declined in the past month after analysts began raising red flags on some of the high valuations.

Almost a third of analysts following Snap recommend buying the stock, according to data compiled by Bloomberg. And there could be an additional catalyst to drive the shares down further: On July 30, insiders who had their shares in a lockup after the IPO will start to be able to sell them.

‘Ghastly Levels’

“With market fears running rampant around Snap’s DAU growth, the lock-up expirations this summer and increased competition from Facebook, sentiment around Snap remains at ghastly levels,” Brian White, a Drexel Hamilton LLC analyst, wrote in a June 29 note, referring to daily active users.

On Snap’s first day of trading on March 2, the stock climbed 44 percent to $24.48. The next day, an additional 11 percent climb brought the shares to their all-time high of $27.09. The positive performance was said to ignite interest from other private companies in holding their own public offerings, after many months of IPO drought.

The enthusiasm didn’t last. While the first six months of the year saw a jump in U.S. tech IPOs from 2016, there is more concern looming over Snap’s listing than its peers. Of the 14 stocks that went public in 2017 through June 8, Snap’s shares were the most-shorted as traders bet the stock will fall.

To contact the reporters on this story: Alex Barinka in New York at abarinka2@bloomberg.net, Arie Shapira in New York at ashapira3@bloomberg.net.

To contact the editors responsible for this story: Jillian Ward at jward56@bloomberg.net, Elizabeth Fournier at efournier5@bloomberg.net, Molly Schuetz, Tony Robinson