Morgan Stanley maintains an Attractive view on the North American internet sector, with valuations still below historical averages ahead of the second-quarter earnings season

Overview

This is a Morgan Stanley pre-earnings-season valuation and comparable company sheet for the North American internet sector. The report focuses on recent share-price performance in the internet sector, the valuation positioning of core companies such as AMZN/GOOGL/META, and valuation differences across sub-sectors including digital media, e-commerce, shared economy, gaming, travel, and real estate technology.

Core views

The core judgment is that although the internet sector has recently pulled back, large internet companies still trade at discounts relative to their own historical average valuations, and the overall sector view remains Attractive. The report focuses on how the market may reprice growth, profitability, and valuations ahead of the second-quarter earnings season, and uses relative performance and multiple valuation metrics to assess positioning across sub-sectors.

Analysis framework

The report uses comparable company analysis and historical valuation comparisons, combined with one-week share-price performance and metrics such as 2026E/2027E EV/Revenue, EV/Gross Profit, EV/EBITDA, FCF yield, EPS, P/E, and short interest, to compare the valuations and market performance of covered North American internet companies.

Methodology notes

• Valuation methodsEV/EBITDA

  Enterprise value relative to EBITDA multiple

  Used to compare operating profit valuation levels across different internet sub-sector companies; the report also shows where NTM EV/EBITDA stands relative to 5-year and 10-year historical averages.

• Valuation methodsP/E

  Price-to-earnings ratio

  Used to measure the 2026E and 2027E earnings valuations of profitable large internet companies such as AMZN, GOOGL, and META.

• Cash FlowFCF yield

  Free cash flow yield

  Used to assess the attractiveness of a company’s market capitalization or enterprise value relative to free cash flow, helping evaluate valuation quality.

• Accounting AdjustmentSBC as Cash

  Treating stock-based compensation as a cash cost

  The report notes that treating SBC as cash would raise EV/EBITDA multiples, by an average of about 36% for digital media, 22% for video games, and 44% for travel/shared economy/real estate technology.

• Market Performance1-Week Price Performance

  One-week share-price performance

  Used to measure recent shifts in market sentiment across sub-sectors and core companies ahead of earnings season.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• North America Internet

  Core covered sector

  Strengths

  The sector view is Attractive, and some large internet companies trade below recent historical average valuations.

  Weaknesses

  The sector has recently pulled back overall, and market sentiment is relatively cautious ahead of earnings season.

  Comparison

  Relative to the SPX/NDX, the internet sector fell about -4% last week, roughly in line with the NDX but weaker than the SPX.

  Risks

  Earnings disappointments, further multiple compression, slowing growth, and regulatory risks.

• AMZN / GOOGL / META

  Representative large internet platforms

  Strengths

  Their 2026E P/E multiples are at discounts to their past 12-month averages and remain valuation anchors for the sector.

  Weaknesses

  GOOGL and META both fell about 3% last week, indicating that the market still has concerns about earnings and growth quality.

  Comparison

  AMZN rose about 1% last week, outperforming GOOGL and META.

  Risks

  Cloud, advertising, and e-commerce growth coming in below expectations, as well as capex or AI investment pressuring margins.

• Digital Ads

  Internet advertising sub-sector

  Strengths

  Covers multiple companies including GOOGL, META, SNAP, PINS, and RDDT, making it easier to compare advertising trends and platform differentiation.

  Weaknesses

  One-week market-cap-weighted performance was about -3.1%, with weaker performance from RDDT, SNAP, and others.

  Comparison

  Compared with the e-commerce sector’s roughly +0.7% one-week performance, digital advertising has been weaker recently.

  Risks

  Advertising budget volatility, intensifying competition, privacy regulation, and changes in platform traffic.

• E-Commerce/Marketplace

  E-commerce and platform transaction sub-sector

  Strengths

  AMZN performed relatively well, and some smaller platforms posted positive one-week performance.

  Weaknesses

  There are significant differences in company size and earnings quality within the sub-sector.

  Comparison

  One-week market-cap-weighted performance was about +0.7%, better than digital advertising.

  Risks

  Slowing consumer demand, fulfillment costs, competitive subsidies, and margin pressure.

• Gaming/Mobile App

  Gaming and mobile application sub-sector

  Strengths

  The report covers comparable companies such as APP, EA, RBLX, TTWO, and U, making it easier to observe differences in growth and earnings valuations.

  Weaknesses

  APP fell 16% last week, showing that high-valuation or high-expectation names are more sensitive to sentiment changes.

  Comparison

  After treating SBC as cash, EV/EBITDA for this group rises by an average of about 22%.

  Risks

  Slowing user growth, uncertainty in content cycles, platform revenue-sharing, and volatility in ad monetization.

• Travel / Shared Economy / Real Estate Tech

  Platforms related to travel, shared economy, and real estate technology

  Strengths

  Covers platform assets such as ABNB, BKNG, EXPE, UBER, LYFT, DASH, and Z.

  Weaknesses

  The SBC adjustment has a relatively large impact, so earnings quality requires close scrutiny.

  Comparison

  After treating SBC as cash, EV/EBITDA for this group rises by an average of about 44%, higher than for the digital media and video game groups.

  Risks

  Macro consumption, travel demand, labor costs, regulation, and real estate cycle risks.

Key data

• One-week performance of the internet sectorabout -4%Versus roughly -2%/-4% for the SPX/NDX over the same period.
• Performance of large platform stocksMETA/GOOGL both about -3%, AMZN about +1%Disclosed in the report’s front-page summary.
• Highly volatile individual stocksAPP -16%, RDDT -7%, SNAP -3%Reflects greater pressure on some internet names ahead of earnings season.
• AMZN/GOOGL/META 2026E P/Eabout 26x/23x/20xAbout 17%/11%/16% below their respective past 12-month averages.
• One-week market-cap-weighted performance of digital advertisingabout -3.1%The table lists GOOGL, META, SNAP, PINS, RDDT, and others.
• One-week market-cap-weighted performance of e-commerceabout +0.7%The table lists AMZN, CHWY, EBAY, ETSY, FIGS, PTON, RVLV, WW, and others.
• Impact of SBC on digital media EV/EBITDAaverage about +36%Valuation multiples rise after treating SBC as a cash cost.
• Impact of SBC on video game EV/EBITDAaverage about +22%Reflects the impact of stock-based compensation on earnings quality and valuation metrics.
• Impact of SBC on travel/shared economy/real estate technology EV/EBITDAaverage about +44%This group is more heavily affected by the SBC adjustment.

Impact & implications

For investors, the implication is that the second-quarter earnings season may become a key window for valuation repricing in the internet sector. Discounted valuations versus historical averages provide some support for large platform stocks, but dispersion among individual names is clear, and SBC-adjusted earnings quality, advertising demand, consumer resilience, and platform growth will determine whether the market continues to assign valuation premiums.

Risks

• Second-quarter earnings or guidance may come in below market expectations, leading to further valuation cuts.
• If demand for internet advertising, e-commerce, and travel weakens, it could pressure revenue growth and margins.
• If the market more strictly treats SBC as a cash cost, the apparent valuation attractiveness of some companies will decline.
• High-valuation and heavily shorted stocks may see greater volatility during earnings season.
• Regulation, competition, AI capital expenditures, and platform policy changes may affect the medium- to long-term profitability of large internet companies.

What to watch

• AMZN, GOOGL, and META second-quarter revenue growth, margins, and capex guidance.
• Marginal changes in advertising demand, pricing, and user engagement at digital advertising companies.
• Whether e-commerce and platform companies can sustain order growth and fulfillment efficiency.
• Whether the gap between SBC-adjusted EV/EBITDA and traditional metrics is repriced by the market.
• Post-earnings expectation revisions for recently weak stocks such as APP, RDDT, and SNAP.
• Changes in NTM EV/EBITDA discounts or premiums relative to 5-year and 10-year historical averages.