After the North American Internet sector's pullback, valuations and AI/macro factors enter a rebalancing phase

Overview

This report provides a cross-sectional comparison and trading-position assessment of the North American Internet industry. Its central question is how the market should reprice Internet stocks after their recent pullback amid company-level micro performance, AI-related investment/narratives, and the macro valuation environment. The report covers Internet-related segments including Digital Ads, eCommerce, Digital Media, Video Games, Travel/Shared Economy, and Real Estate Tech, examining peer valuations, short-term share-price performance, short interest, and valuations adjusted for SBC.

Core views

The report's core view is that although Internet stocks have significantly underperformed the broader market in the short term, Morgan Stanley maintains an Attractive view on the North American Internet industry. However, trading signals within the sector are clearly divergent: earnings multiples for major platforms AMZN, GOOGL, and META are discounted relative to historical averages, while some sales-multiple metrics remain above historical averages, indicating that a pullback does not mean the sector is broadly cheap. The effects of AI investment and macro interest rates/risk appetite on valuations need to be assessed together with company-level growth, margins, and the true cost of SBC.

Analysis framework

The report uses peer-comparison tables, 1-week/1-month/YTD share-price performance, short interest, NTM EV/EBITDA, NTM EV/Sales, 2027 EPS multiples, and SBC cash-cost adjustments to compare the trading positions of Internet subsectors and key companies relative to historical averages, indices, and peers.

Methodology notes

• Valuation analysisPeer valuation comparison

  Uses EV/EBITDA, EV/Sales, and 2027 EPS multiples to compare Internet companies' valuation positions relative to historical averages.

  This method determines whether valuations after the recent pullback are below or above 5-year, 10-year, or TTM historical averages and identifies valuation divergence between major platforms and subsectors.

• Market performance attributionPrice performance and relative performance analysis

  Compares 1-week, 1-month, and YTD share-price changes against SPX/NDX performance.

  This method distinguishes between a sector-wide pullback, excess declines in individual stocks, and changes in risk appetite relative to the broader market.

• Accounting quality adjustmentSBC cash-cost adjustment

  Treats stock-based compensation, or SBC, as a cash cost and reassesses EV/EBITDA multiples.

  This adjustment highlights the dilutive impact of SBC on Internet companies' true earnings power and valuations, particularly in high-SBC segments such as Digital Media, eCommerce, Video Games, and Shared Economy.

• Rating frameworkMorgan Stanley industry view and stock rating system

  Industry views use Attractive, In-Line, and Cautious; stock ratings use Overweight, Equal-weight, Not-Rated, and Underweight.

  The reference benchmark for the North American industry view is the S&P 500, with typical assessment of relative performance over the next 12-18 months.

Asset mapping & comparison

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

• North America Internet equities

  Core asset covered by the report

  Strengths

  The industry view is Attractive, some earnings multiples are below historical averages, and the sector's pullback provides a basis for reassessing allocation value.

  Weaknesses

  The sector has significantly underperformed the SPX/NDX in the short term, valuation indicators are divergent, and some sales multiples remain above historical averages.

  Comparison

  Relative to the SPX/NDX, the Internet sector fell approximately 7% last week, significantly weaker than the indices' approximately -1%/-2% performance.

  Risks

  Macro valuation pressure, uncertainty around AI investment returns, SBC costs, and volatility in the advertising and consumer cycles.

• AMZN/GOOGL/META

  Representatives of major Internet platforms

  Strengths

  Their 2027 EPS multiples are meaningfully discounted relative to TTM averages, potentially providing medium-term valuation support after the pullback.

  Weaknesses

  Recent share-price declines have been significant: META and GOOGL each fell approximately 8%, while AMZN fell approximately 6%.

  Comparison

  AMZN/GOOGL/META trade at approximately 20x/21x/18x 2027 EPS, about 25%/19%/12% below their respective TTM averages.

  Risks

  AI investment intensity, advertising growth, regulatory pressure, margin delivery, and macro risk appetite.

• Digital Ads

  Internet subsector

  Strengths

  The segment is linked to major platforms and ad-tech companies, with potential for improved advertising efficiency from AI and recovery in digital advertising budgets.

  Weaknesses

  Short-term price volatility is high, and valuations and growth expectations for some companies may be sensitive.

  Comparison

  The report compares Digital Ads with Travel/Shared Economy and other segments based on 1-week price performance.

  Risks

  A weakening advertising cycle, uncertain AI investment returns, intensifying competition, and valuation compression.

• Travel/Shared Economy

  Internet subsector

  Strengths

  Covers platform assets such as UBER, LYFT, and ABNB, benefiting from scale effects and the digitalization of offline services.

  Weaknesses

  UBER and LYFT each fell approximately 9% recently, while LYFT's short interest reached 24.8%.

  Comparison

  After SBC cash conversion, the EV/EBITDA multiple for this segment combined with Real Estate Tech rises by approximately 44% on average, higher than for the other listed segments.

  Risks

  Fluctuations in transportation demand, regulation and labor costs, uncertainty around M&A events, and dilution of true earnings by SBC.

• eCommerce

  Internet subsector

  Strengths

  eCommerce platforms benefit from online consumption and economies of scale, and some leading companies offer greater comparative value after the valuation pullback.

  Weaknesses

  Treating SBC as a cash cost raises the average EV/EBITDA multiple by approximately 30%, so earnings quality requires adjusted analysis.

  Comparison

  The impact of the SBC adjustment is lower than for the Travel/Shared Economy/Real Estate Tech combination but higher than for Video Games.

  Risks

  Slowing consumption, fulfillment costs, competition, and SBC dilution.

• Video Games

  Internet subsector

  Strengths

  The average impact of the SBC cash-conversion adjustment on EV/EBITDA is approximately 22%, relatively low among the listed segments.

  Weaknesses

  Game demand, content cycles, and platform competition may cause earnings volatility.

  Comparison

  The impact of the SBC adjustment is lower than for Digital Media, eCommerce, and the Travel/Shared Economy/Real Estate Tech combination.

  Risks

  New releases falling short of expectations, competition for user time, regulation, and downward valuation revisions.

Key data

• 1-week Internet sector performance-7%SPX/NDX were approximately -1%/-2% over the same period.
• 1-week performance of major platformsMETA -8%, GOOGL -8%, AMZN -6%The report identifies major Internet platforms as an important source of the sector's decline.
• 1-week performance of Shared Economy-related stocksUBER -9%, LYFT -9%The Travel/Shared Economy segment also experienced a significant pullback.
• APP 1-week performance-8%The report lists APP as one of the Internet-related names with a relatively sharp recent decline.
• AMZN/GOOGL/META 2027 EPS multiples20x/21x/18xApproximately 25%/19%/12% below their respective TTM averages.
• NTM EV/EBITDA relative to historical averagesApproximately -14%/-20% versus the 5-year/10-year averagesIndicates valuations below medium- and long-term averages on an EBITDA basis.
• NTM EV/Sales relative to historical averagesApproximately +10%/+11% versus the 5-year/10-year averagesSales multiples remain above historical averages, suggesting that the scope for valuation recovery should be assessed cautiously.
• Impact of SBC cash conversion on Digital Media EV/EBITDAApproximately +36%Multiples rise on average when SBC is treated as a cash cost.
• Impact of SBC cash conversion on eCommerce EV/EBITDAApproximately +30%eCommerce valuations rise materially after the SBC adjustment.
• Impact of SBC cash conversion on Video Games EV/EBITDAApproximately +22%The Video Games segment is relatively less affected by the SBC adjustment, but the impact remains material.
• Impact of SBC cash conversion on Travel/Shared Economy/Real Estate Tech EV/EBITDAApproximately +44%This combined segment is most affected by the SBC cash-conversion adjustment.
• LYFT short interest24.8%The table shows LYFT among the stocks with the highest short interest.
• OPEN short interest20.8%The table also shows OPEN in a high-short-interest range.

Impact & implications

For investors, the recent Internet-sector pullback creates an opportunity to reassess valuations and fundamentals, but the signals are neither simply bullish nor bearish. Discounts in major platforms' earnings multiples may support medium-term allocation appeal, while elevated EV/Sales multiples, the true cost of SBC, uncertainty around AI capital expenditures, and fluctuations in macro risk appetite may limit valuation expansion. At the portfolio level, greater emphasis should be placed on subsector differences, earnings quality, and the realization of relative performance against the broader market over the next 12-18 months.

Risks

• Changes in macro interest rates and risk appetite may continue to pressure valuations of long-duration growth stocks.
• The scale, commercialization pace, and return on AI investment remain uncertain and may affect expectations for margins and free cash flow.
• If SBC is treated as a cash cost, it materially raises the true EV/EBITDA multiples of some Internet companies.
• The Internet sector has recently significantly underperformed the SPX/NDX, and short-term momentum and fund flows may remain weak.
• Digital Ads, eCommerce, Travel/Shared Economy, and Video Games are affected differently by consumption, advertising budgets, and competitive dynamics, creating a high risk of divergence within the sector.
• The report discloses that Morgan Stanley has investment banking, market-making, ownership, or other business relationships with several covered companies; potential conflicts of interest should be considered when using its conclusions.

What to watch

• Changes in AI capital expenditures, margins, and advertising/cloud growth in subsequent results from AMZN, GOOGL, and META.
• Subsequent recovery or further compression of NTM EV/EBITDA and EV/Sales relative to 5-year and 10-year averages.
• Changes in SBC as a percentage of earnings and its impact on adjusted earnings and valuation multiples.
• Price volatility and fundamental catalysts for stocks with high short interest, such as LYFT and OPEN.
• The transmission of SPX/NDX performance, rate expectations, and risk appetite into valuations of Internet growth stocks.
• Progress on transactions related to UBER and Delivery Hero and their impact on sentiment toward the Shared Economy segment.