Snap Inc shares fell 5.6 percent on Tuesday, after lead underwriter Morgan Stanley downgraded the stock and raised concerns about the social media company's ability to compete against rival Instagram.

Snap shares were trading at $16.04, after closing below its $17 IPO price for the first time on Monday. The Snapchat owner's market debut in March was the hottest U.S. technology listing in years.

The downgrade comes ahead of the expiry of the stock's lock-up period on July 29.

In an unusual move for an IPO's lead underwriter, Morgan Stanley cut its rating on the Snapchat parent to "equal-weight" from "outperform", and also slashed its price target to $16 from $28.

The brokerage's price target now sits below Snap's median price target of $19.50.

Dipping below an IPO price is seen on Wall Street as a setback to be avoided by chief executives and their underwriters, but it is not uncommon for Silicon Valley companies.

Snapchat has gained popularity among people under 30, but many on Wall Street have been critical of Snap's lofty valuation and slowing user growth.

The company faces increasing competition from Facebook, which once made a $3 billion bid for Snapchat.

The social media giant has made the camera a central piece of its apps and offers features similar to Snap on its platforms, including Instagram and WhatsApp.

In June, Instagram said its Stories feature had 250 million users, compared with 166 million users for Snapchat at the end of the first quarter.

Besides rising competition from Instagram, Morgan Stanley analyst Brian Nowak also said user growth trends have been modestly weaker than expected.

"We have been wrong about Snap's ability to innovate and improve its ad product this year and user monetization as it works to move beyond 'experimental' ad budgets into larger branded and direct response ad allocations," Nowak said in the note.

Morgan Stanley cut its estimates for Snap's 2017 revenue by 6.9 percent to $897 million, and daily active user expectations by 1.6 percent to 182 million.

Goldman Sachs, another lead underwriter, still has a "buy" and an unchanged $27 price target.

Up to Monday's close, Snap has lost about 42 percent since its early highs after its IPO.

Reuters (Reporting by Anya George Tharakan in Bengaluru; Editing by Shounak Dasgupta)