Grocery Outlet Holding Corp. is getting ahead of itself, according to Morgan Stanley. The bank on Tuesday downgraded the discount grocery store chain to underweight from equal weight. Morgan Stanley did raise its price target on the stock to $33 per share from $29, though the new target still implies downside of more than 20% from Monday's closing price. Morgan Stanley said the downgrade is based on two factors: There's downside risk to the grocer's 2023 estimates and not as much upside to its 2022 estimates as is being baked in. And, the stock has surged 48% this year, outperforming the broader market, which is high compared to other similar companies in the bank's coverage. The new rating is not a reflection of Grocery Outlet's fundamentals, longer-term growth runway or near-term fundamentals, analyst Simeon Gutman wrote Tuesday. "Rather, the stock has gotten ahead of its fundamentals and seems priced for perfection, which drives a negative risk/reward skew and ~20% downside to our $33 PT (up from $29 post Q2 results)," he said. The company was in an interesting position during the pandemic, when consumers drifted away from discount retailers, Gutman said. Now, however, inflationary pressures are helping companies like Grocery Outlet, which should remain supported through the end of the year. Still, because the grocer has relatively low margins, near-term sales upside may not drive significantly higher earnings power, according to Gutman. "As a result, we see modest only upside to '22 EPS, even if sales continue to outperform," he said, adding "In our view, the stock is pricing in more pronounced near-term outperformance on EBITDA/EPS, which we think is difficult to underwrite. Consider that the stock fell ~6.5% after Q2earnings despite the company delivering ~10%/~20% EBITDA/EPS beats." —CNBC's Michael Bloom contributed to this report.