That was the bombshell line leading off a note on Snap from Morgan Stanley on Tuesday morning.
Snap's lead initial public offering underwriter downgraded the company to a neutral and lowered its price target by 42% to $16. The bank's bear case for the stock is $7.
"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," Brian Nowak, an analyst at Morgan Stanley, wrote in a note to clients Tuesday.
Morgan Stanley's equity research team has a complex history covering Snap. As Business Insider reported in April, the bank issued a correction on it's first research note on Snap, changing a range of important metrics in its financial model but not the original $28 price target.
Nowak is not giving up hope on the company. Most of his reasons for the downgrade are related to a slower than expected schedule of improvements. Snap has been sluggish in attracting new users, releasing new features and satisfying advertisers.
"We move to [neutral] and will monitor four areas of innovation which could improve SNAP's ad product and advertiser demand," Nowak wrote. "For now, though, we are 9%/12% below Street '17/'18 revenue and 16%/76% below on adj EBITDA."
The note included four distinct areas that are holding Snap's growth back. They are as follows:
1. Poor ad completion rates: The initial draw of Snapchat was that advertisers could place their ads in between content created by its users. This felt more personal than many other platforms, and Snap promised advertisers access to the desirable millennial consumer bracket. The problem is, Snap has failed to deliver on those promises. Completion rates for ads on Snapchat have been lower than expected, according to Morgan Stanley. This has made advertisers hesitant to continue advertising on the platform when rivals like Instagram and Facebook offer higher completion rates.
2. Lower return on investment: When an advertiser spends money on an ad, they are hoping to see a tangible benefit to buying said ad. On Snap's platform, advertisers are seeing a lower return on their investments than rival platforms. According to Morgan Stanley, this means advertisers are not increasing ad budgets on the platform.
3. Snap's delay in bidding platform rollout: Snap has developed an automated bidding platform for advertisers to place ads within Snapchat, but the product has been rolling out slower than expected. Nowak doesn't expect the technology to be fully operational by the end of 2017, or early 2018. This is delaying advertisers' ability to buy ads on Snap's platform easily.
4. Increased competition: Instagram and Facebook have been replicating new features of Snapchat faster than investors expected. Both of the rival platforms, both owned by Facebook, have copied Snap's flagship "stories" feature. Instagram has been offering advertisers free lens, according to Nowak. The free ad placements are eating into Snap's main source of revenue. Sponsored lenses account for 50% of Snap's revenue according to Nowak.
Those four problem areas, if improved, don't have to hold Snap's growth back forever.
"It is important to remember that this isn't the first time we have seen developing ad platforms struggle and need to evolve and improve their offerings. Google Search, YouTube, Facebook, and Twitter, among others have all gone through growing pains...as the key now is SNAP's ability to execute and improve its ad offering," Nowak said.
Snap's stock price has fallen 34.85% since opening for trading. Shares have dropped below Morgan Stanley's price target briefly on Tuesday, but are currently trading around $16.00.
This post originally appeared on Business Insider.