Twitter shares tumbled by as much a 6.37% to $28.94 per share right out of the gate this morning following a downgrade from Morgan Stanley and bearish previews of the company’s next earnings report. As of this writing, the stock was still declining in fairly heavy trading volume. As of 12:30 p.m., more than 18 million shares of Twitter had changed hands, compared to the daily average of 21.7 million.

Twitter Inc (TWTR) Slides After Analyst Downgrade

Twitter downgraded to Underweight

In a report dated Oct. 21, Morgan Stanley analyst Brian Nowak and his team said they downgraded Twitter to Underweight and slashed their price target from $36 to $34 per share. They cited four main reasons. The first is hardly surprising, as it is slow user growth and falling engagement.

The second is “lack of material incremental advertiser demand,” while the third is an ad load and prices that are already high, and the fourth is increasing competition in the mobile area, which they think is limiting the micro-blogging platform’s earnings power.

Twitter faces numerous problems

On the topic of ad load, Nowak thinks Twitter has already reached its ceiling. He estimates that the micro-blogging platform’s ad load is already 10 times higher than that of Facebook after adjusting for time spent on the platform. As a result, believes click-through rates on Twitter may decline as the number of ads per user goes up. This would reduce the return on investment for advertisers and potentially dampen user growth even further and maybe even result in the number of monthly active users decline.

The Morgan Stanley team also notes that current engagement trends are running counter to the ad opportunities on Twitter as the average amount of time each mobile user spends on the micro-blogging platform is declining. And what’s worse is that the decline is actually accelerating, as he estimates that it fell 33% year over year during the third quarter.

Twitter charging too much for ads?

Nowak also thinks Twitter’s ad pricing is high because of its limited reach. He estimates that cost per impression on Twitter already sell for a 13% premium to those on Facebook. Further, he said in his conversations with marketers, they have been noticing that Twitter’s ability to scale is limited, so they’re holding back some of their ad budgets from the micro-blogging platform.

And because of Twitter’s high cost relative to its limited reach, the company faces greater risks of losing more ad spend as competition from Snapchat, YouTube, Instagram and others heats up even further.

Twitter expected to disappoint again

Twitter is scheduled to release its next earnings report on Tuesday after closing bell, and Nowak said the main risk to his downgrade of the company is a reacceleration in monthly active user growth. However, the trend has been the opposite since the company went public, and his data suggests that growth remains “tepid.” Further, he doesn’t think the new Moments product can change the behavior of consumers.