Divergence in the Internet Sector: AI Giants Under Pressure, Travel and Gaming Stocks Lead Gains
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Divergence in the Internet Sector: AI Giants Under Pressure, Travel and Gaming Stocks Lead Gains
Morgan Stanley highlights divergence within the internet sector: Google and Meta declined, while Booking, Lyft, and Roblox posted strong gains, as the market continues to identify non-mega-cap beneficiaries of AI.
- The internet sector declined 2%, underperforming both the S&P 500 and Nasdaq indices.
- Google (GOOGL) and Meta (META) fell 3% and 1%, respectively, while Amazon (AMZN) rose 1%.
- Travel and sharing-economy stocks performed strongly: Booking (+4%), Lyft (+7%), and Roblox (+12%) led gains.
- Market focus has shifted toward identifying which companies beyond mega-cap tech firms can truly benefit from AI.
- Includes a detailed comparable-company valuation table covering key metrics such as EV/EBITDA and P/E.
Report interpretation
Overview
This report, published by Morgan Stanley, analyzes the current trading landscape of the North American internet sector, particularly focusing on performance disparities between 'AI-centric' and 'everything else' narratives. It notes that while large-cap tech stocks—including Google and Meta—have recently faced selling pressure, companies in travel, sharing economy, and gaming have demonstrated robust momentum. The firm maintains its 'Attractive' rating for the North American internet sector and provides detailed data charts illustrating valuation levels and recent price movements across sub-sectors and key companies, helping investors identify relative winners and losers.
Core views
Recent market performance reveals pronounced intra-sector divergence. Against a backdrop where both the S&P 500 and Nasdaq indices rose 1%, the internet sector declined 2%. Notably, AI bellwethers Google (GOOGL) and Meta (META) fell 3% and 1%, respectively—reflecting investor concerns about AI investment returns or competitive dynamics. In contrast, Amazon (AMZN) rose 1%. Meanwhile, non-AI-themed sub-sectors stood out. Online travel agency Booking Holdings (BKNG) gained 4%, ride-hailing platform Lyft (LYFT) rose 7%, and gaming platform Roblox (RBLX) surged 12%. This suggests capital is rotating toward names with more attractive valuations or independent fundamental catalysts—not just large AI-themed stocks. The report emphasizes that the number of internet 'winners' this year has been limited, largely because the market remains uncertain about which companies beyond mega-cap tech firms can genuinely capture AI-related benefits. This uncertainty has driven sector rotation and dispersion.
Analysis framework
The firm employs a dual analytical framework combining cross-sectional comparison and historical valuation percentile analysis. First, it breaks down the internet sector into sub-segments—including digital media, e-commerce, sharing economy, gaming, travel, and PropTech—and calculates market-cap-weighted one-week, one-month, and year-to-date price performance to identify near-term capital flows. Second, the report uses EV/EBITDA as the primary valuation anchor, comparing forward-looking EV/EBITDA multiples for Amazon, Google, and Meta against their 2-year and 3-year historical averages to assess whether current valuations reflect premiums or discounts. For example, Google’s current multiple trades at a 33% premium to its 2-year average, whereas Meta trades at a 21% discount. Additionally, the report introduces an SBC-adjusted EV/EBITDA metric—treating stock-based compensation as a cash expense—to more accurately reflect companies’ cash-generating ability and shareholder return potential, revealing valuation differences masked by standard accounting treatments.
Methodology notes
Using forward-looking enterprise value multiples (NTM EV/EBITDA) for cross-company and inter-temporal comparisons
EV/EBITDA eliminates distortions from capital structure and tax differences, making it well-suited for comparing internet firms with high depreciation or asset intensity. The report benchmarks current multiples against historical averages to assess whether valuations appear stretched or undemanding.
SBC-Adjusted EV/EBITDA
Adjusting for stock-based compensation (SBC) as a cash outflow yields a more conservative and realistic view of technology firms’ underlying profitability and valuation, avoiding cost underestimation inherent in conventional metrics.
Market skepticism regarding the breadth of AI beneficiaries drives capital rotation
The report observes that the market is reassessing the scope of AI beneficiaries; this uncertainty has triggered capital flows away from pure AI narrative stocks toward travel and gaming names with stronger near-term earnings visibility.
Asset mapping & comparison
Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).
- Booking Holdings (BKNG)Beneficiary
- Strengths
- Weekly gain of +4%; strong travel sector performance
- Comparison
- Outperformed digital media segment
- Lyft (LYFT)Beneficiary
- Strengths
- Weekly gain of +7%; rebound in sharing economy segment
- Comparison
- Outperformed Uber (-4.4%)
- Roblox (RBLX)Beneficiary
- Strengths
- Weekly gain of +12%; leadership in gaming segment
- Comparison
- Significantly outperformed other gaming stocks
- Alphabet (GOOGL)Under Pressure
- Weaknesses
- Weekly decline of -3%; valuation trades at 33% premium to historical average
- Comparison
- Underperformed Amazon
- Risks
- Uncertainty around AI investment returns
- Meta Platforms (META)Under Pressure
- Strengths
- Valuation trades at 21% discount to historical average
- Weaknesses
- Weekly decline of -1%
- Comparison
- Underperformed Amazon
- Risks
- AI competitive pressures
Key data
- Internet Sector Weekly Return-2%Underperformed S&P 500 and Nasdaq (both +1%)
- Google (GOOGL) Weekly Return-3%Largest decliner among major tech stocks
- Roblox (RBLX) Weekly Return+12%One of the best-performing internet stocks
- Google (GOOGL) NTM EV/EBITDA18.3x33% premium to 2-year average
- Meta (META) NTM EV/EBITDA10.0x21% discount to 2-year average
- Amazon (AMZN) NTM EV/EBITDA12.7x2% discount to 2-year average
Impact & implications
The report argues that the investment thesis for the internet sector is shifting—from a narrow 'AI narrative' toward broader 'fundamental validation.' For investors, this implies greater diligence is required to distinguish companies that will meaningfully profit from AI—not simply chasing mega-cap tech stocks. Simultaneously, the strength in travel and gaming signals structural opportunities within the sector—areas potentially benefiting from reasonable valuations or cyclical tailwinds. Maintaining the 'Attractive' sector rating reflects the firm’s view that the overall group retains portfolio allocation appeal, albeit with heightened stock selection difficulty.
Risks
- Uncertainty surrounding the identification of AI beneficiaries may amplify stock volatility.
- Valuations for mega-cap tech stocks remain elevated or at historical premiums, exposing them to downside risk.
- Macroeconomic shifts could impact advertising spend and consumer discretionary spending.
What to watch
- Progress and earnings realization from AI applications at non-mega-cap internet companies.
- Sustainability of the strong performance in travel, sharing economy, and gaming segments.
- Whether giants like Google and Meta can de-risk their elevated valuations and demonstrate AI investments’ profitability.