In a note to clients on Wednesday, the bank maintained its neutral rating of the company, but lowered its price target from $16 to $14.
"We believe Snap's core ad product is still lacking the performance (low click-through rates), measurability, and advertising return on investment to inflect ad dollar growth," Brian Nowak, an analyst at Morgan Stanley, wrote.
Recently, the company has been focused on improving its advertising prowess. Snap released a new ad platform that makes it easier to buy and track ads and has added new locations for these ads like its new "Snap Maps" feature.
While the company seems to be making the right moves, it isn't moving fast enough to meaningfully increase advertising revenue in the short term. According to Nowak, the sluggish performance means ad revenue will be lower by about 8.5% for the next two years, compared to previous estimates.
Engagement on the platform remains one of Snap's strengths. Even if advertising revenue comes up short in the near-term, Nowak is optimistic about the longer term opportunities. Engagement time per day by Snap's users is up 15% since the fourth quarter of 2016, equating to an average of more than 40 minutes per day for those under 40.
In terms of engagement, Snap recently overtook rivals Facebook and Instagram with teenagers. If the company is able to demonstrate that advertisers are willing to spend more than their current budgets on Snapchat ads, Nowak sees Snap's share price eventually growing to $25.
Since IPOing at $17 on March 1, Snap shares have fallen 14%.
Snap is up 0.43% on Wednesday, and will have closed higher for six of the last seven trading days if it maintains its gains.