Morgan Stanley Finally Admits How It Really Feels About Snap

Cast your memory back to the early days of Snap Inc’s life as a publicly traded company. Shares were on fire, millennial day traders were ebullient, and almost without fail, Snap’s underwriters pronounced the stock a buy. There was one little hiccup in the coverage fest, however. Morgan Stanley, a lead underwriter, first issued a note putting the stock at bullish $28, then had to walk it back a day later after its analysts realized they’d goofed up the math. The new estimate cut free cash flow by 40 percent and EBITDA by 26 percent. Yet somehow, the $28 price target remained the same.

That’s curious!

Now, three months and a billion-odd Snap trades later, Morgan Stanley analyst Brian Nowak has finally taken the time to reach deep within himself and connect with his true feelings on Snap:

“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 the aftermath of the note Tuesday, Snap finally fell below its IPO price of $17.

It’s heartening to see Nowak has come around to the truth that has been staring us in the face all along, but his reasoning remains unconvincing. Snap’s ability to capitalize on the ad front was indeed an open question leading up to the IPO, but the notion that Facebook (via Instagram) is a novel concern may be a bit harder to swallow. It was evident that Facebook was roughhousing with its upstart competitor before the IPO; afterwards the relationship became more of a bloodsport.

Elsewhere the mood on Snap is far grimmer. Here’s a good one:

“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.

But hey, there’s still the dancing hot dog.

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