Cricut's (CRCT) Q2 results showed signs of improvement as user engagement stabilized, but continued "weakness" in accessories and materials left a sustainable financial recovery unproven, Morgan Stanley said in a report Wednesday.

Revenue fell 9% from a year earlier and missed expectations because of lower accessories and materials volumes, reduced average selling prices and increased promotional activity, according to the report. The firm said stabilizing engaged-user trends mark an "important step in the right direction," although the improvement has yet to translate into stronger financial results.

The company's management expects new products, improved onboarding, international expansion and higher user engagement to help return revenue to growth in H2, according to the report. The firm said those initiatives could improve accessories and materials trends, but the recovery remains a "show-me story."

Morgan Stanley maintained an underweight rating on Cricut and increased its price target to $3.70 from $3.10.

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