E.l.f. Beauty's (ELF) core cosmetics share losses are concerning and expected to worsen after cycling summer 2025 pricing, driven by pressure from smaller brands as the category fragments, Morgan Stanley said in a note Friday.

Concerns surrounding the company's base market share in US cosmetics and a slowdown in organic growth trends will potentially limit the stock, despite Naturium growth and better-than-expected rhode contribution to sales, according to the note.

If core e.l.f. cosmetics declines, which is likely this fall, the stock could be pressured, Morgan Stanley said, adding that stronger-than-expected rhode contribution in the first year could eventually weigh on stock sentiment if organic sales growth trends for the brand decline in the second year.

Korean beauty momentum may also divert available consumer spend from e.l.f.'s core cosmetics business and could eventually pressure Naturium and rhode as well, despite their near-term strength, the brokerage said.

Morgan Stanley downgraded e.l.f. Beauty to equal-weight from overweight, and lowered the price target to $67 from $80.

Shares of the company were down more than 3% in Friday trading.

Price: 61.94, Change: -2.03, Percent Change: -3.17