What happened

Shares of Snapchat operator Snap (NYSE:SNAP) fell today, down by 8% as of 12:40 p.m. EDT, after Morgan Stanley -- one of the lead underwriters in the company's March IPO -- downgraded the stock from overweight to equal weight.

So what

Analyst Brian Nowak has cut his price target on Snap shares from $28 to $16, citing numerous challenges that the company faces in growing its core advertising business.

Snapchat logo

Image source: Snap.

Advertisers are having a hard time earning an acceptable return on investment (ROI) for their ad campaigns on the platform, and Snap has not been innovating on new ad products. Competition from Facebook's Instagram is also intensifying, offering similar ad products for free. User growth is also expected to continue lagging based on the rate at which users are downloading Snapchat.

Now what

The analyst has reduced numerous estimates for Snap, modeling for $879 million in revenue this year (down from a prior estimate of $945 million). Nowak also doesn't expect Snap's relatively new automated ad bidding platform to begin scaling until late 2017 or early 2018. Snap's advertiser base remains concentrated among "experimental" buyers; advertisers that spent $15 or more comprise roughly half of all ad revenue, according to the analyst.

Morgan Stanley expects Snapchat to finish out the year with roughly 182 million daily active users (DAUs), representing modest sequential growth from the 166 million DAUs at the end of the first quarter.

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