Bloomberg News

Shares of Yelp Inc. (YELP - Get Report)   fell 3.9% to $34.31 Thursday after Morgan Stanley analyst Brian Nowak downgraded the search company to "underweight" from "equal weight" and reduced the price target to $29 from $31.

Nowak said that Yelp's introduction of non-term agreements with no minimum dollar commitments has depressed average revenue per user this year. He also expects eventual underperformance in revenue, revenue per account and EBITDA.

Nowak wrote that "we see this pressure continuing as advertisers will now be able to adjust their spend real-time based on results (transactions, clicks, etc.), which we expect to drive ARPU down."

Morgan Stanley estimated Yelp would need to open 40,000 additional accounts this year to offset the spending decline. With pricing four times the cost-per-click of Alphabet Inc. (GOOGL - Get Report)  and Facebook Inc.  (FB - Get Report) Nowak wrote, attracting new clients could prove challenging.

Nowak added that "early experimentation and higher conversion may explain some of this pricing differential, but we question the sustainability of this pricing umbrella given the negative advertiser feedback, the new ability to adjust bidding based on results and GOOGL/FB's continued push to capture local ad budgets."

In November, Yelp reported disappointing third-quarter sales and predicted another disappointment for the holiday period, blaming internal issues including its sales force.

Yelp reported net income of $15 million, or 17 cents a share, on sales of $241.1 million, up from $223.3 million a year ago. Analysts were looking for earnings of 10 cents a share on sales of $245.4 million.

Alphabet and Facebook are holdings in Jim Cramer's Action Alerts PLUS member club. Want to be alerted before Jim Cramer buys or sells the stocks? Learn more now.