After the pullback in the North America Internet sector, valuations and company-level fundamentals are back in focus

Overview

This report is Morgan Stanley's trading and valuation review of the North America Internet sector, centered on changes in market pricing among company-level fundamentals, AI, and macro factors. The report notes that the Internet sector has seen a notable recent pullback, with declines concentrated in large digital advertising, e-commerce, and sharing-economy-related companies; at the same time, the earnings multiples of some leading companies have fallen below historical averages.

Core views

The core view is that the Internet sector is being pressured in the short term by changes in macro conditions and the AI narrative, but the pullback in leading-company valuations makes them more worthy of reassessment. The report provides valuation comparisons for major Internet companies such as AMZN, GOOGL, and META, and uses one-week, one-month, and year-to-date performance as well as short interest to assess market crowding and risk appetite. The overall North America Internet sector view is Attractive.

Analysis framework

The report uses comparable-company valuation, stock-price performance, short-interest positioning, and industry grouping comparisons to assess where the Internet sector is currently trading. Key metrics include 2027 EPS multiples, NTM EV/EBITDA, NTM EV/Sales, SBC-adjusted EV/EBITDA, and short-term price performance across different Internet sub-sectors.

Methodology notes

• Valuation comparisonComparable-company multiple analysis

  Assess valuation positioning by comparing P/E, EV/EBITDA, and EV/Sales against historical averages.

  The report compares the current or forward valuations of AMZN, GOOGL, META, and others against their average levels over the past 12 months, 5 years, and 10 years to evaluate relative attractiveness after the pullback.

• Trading crowdingStock-price performance and short-interest observation

  Use short-term returns, monthly returns, year-to-date performance, and short interest to identify market pressure points.

  The report presents one-week, one-month, and year-to-date performance for Internet companies and compares those with relatively high or low short-interest positioning.

• Earnings quality adjustmentSBC cash-cost adjustment

  Recalculate EV/EBITDA after treating stock-based compensation (SBC) as a cash cost.

  The report points out that in sub-sectors such as digital media, e-commerce, video games, and travel/sharing economy/PropTech, SBC adjustment would cause EV/EBITDA multiples to rise meaningfully.

Asset mapping & comparison

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

• META

  Representative large-scale digital advertising and social platform

  Strengths

  Its 2027 EPS multiple is about 18x, around 12% below its average over the past 12 months, while one-month performance remains positive.

  Weaknesses

  It fell about -8% over one week, with short-term pressure from the sector pullback and expectations for AI investment.

  Comparison

  It is grouped with AMZN and GOOGL as a leading large-cap Internet company, with a smaller valuation pullback than AMZN and GOOGL.

  Risks

  A slowdown in the advertising cycle, lower-than-expected returns on AI capital spending, and regulatory and platform competition.

• GOOGL

  Core company in search, advertising, and AI infrastructure

  Strengths

  Its 2027 EPS multiple is about 21x, around 19% below its average over the past 12 months.

  Weaknesses

  It fell about -8% over one week and about -7.4% over one month.

  Comparison

  Its valuation discount falls between those of AMZN and META.

  Risks

  AI search substitution, volatility in advertising growth, and regulatory pressure.

• AMZN

  Leader in e-commerce and cloud computing

  Strengths

  Its 2027 EPS multiple is about 20x, around 25% below its average over the past 12 months, representing the largest discount among the three major leaders.

  Weaknesses

  It fell about -6% over one week and remains affected in the short term by expectations for consumer demand and cloud growth.

  Comparison

  Compared with META and GOOGL, it shows a more pronounced discount relative to its past-12-month average.

  Risks

  Weaker consumer demand, slower-than-expected cloud business growth, and slower margin recovery.

• LYFT

  Ride-sharing company

  Strengths

  The stock is rated Equal-weight in the coverage table, with a price of $15.09.

  Weaknesses

  It fell about -8.5% to -9% over one week, with short interest at about 24.8%, ranking near the top in bearish positioning.

  Comparison

  Like UBER, it is one of the sharing-economy names facing elevated trading pressure.

  Risks

  Competitive pressure, demand volatility, unsustained margin improvement, and volatility driven by crowded short positioning.

Key data

• One-week performance of the Internet sectorabout -7%During the same period, SPX/NDX were about -1%/-2%.
• META one-week performanceabout -8%META's 2027 EPS multiple is about 18x, around 12% below its average over the past 12 months.
• GOOGL one-week performanceabout -8%GOOGL's 2027 EPS multiple is about 21x, around 19% below its average over the past 12 months.
• AMZN one-week performanceabout -6%AMZN's 2027 EPS multiple is about 20x, around 25% below its average over the past 12 months.
• UBER and LYFT one-week performanceUBER about -9%, LYFT about -9%Sharing-economy-related stocks came under pressure during the short-term pullback.
• NTM EV/EBITDA relative to historical averagesabout -14%/-20% vs. 5-year/10-year averagesThis shows EBITDA-based valuations are below long-term averages.
• NTM EV/Sales relative to historical averagesabout +10%/+11% vs. 5-year/10-year averagesSales-based valuations remain above historical averages.
• Impact of SBC adjustmentDigital media about +36%, e-commerce about +30%, video games about +22%, travel/sharing economy/PropTech about +44%This indicates the average increase in EV/EBITDA multiples if SBC is treated as a cash cost.

Impact & implications

For investors, the report implies that opportunities in the Internet sector should not be assessed solely on short-term declines, but in combination with earnings quality, SBC, returns on AI investment, the macro rate environment, and the resilience of advertising and consumer demand. The pullback in valuations may improve the attractiveness of leading companies, but EV/Sales remains above historical averages, suggesting that the market has not yet fully de-risked its growth pricing.

Risks

• A worsening macro environment may continue to pressure growth-stock valuations.
• If AI investment spending fails to translate into revenue or profit, it could weigh on the valuations of large Internet companies.
• If demand in advertising, e-commerce, and the sharing economy slows, earnings expectations may be revised downward.
• If SBC is treated as a real cash cost, the appeal of some companies' earnings multiples will decline.
• Morgan Stanley may have investment banking services, shareholdings, or potential business relationships with some covered companies, so the report should be interpreted cautiously in conjunction with the disclosures.

What to watch

• Revenue growth, margins, and returns on AI investment in upcoming earnings reports from AMZN, GOOGL, and META.
• Whether the Internet sector's relative performance versus SPX/NDX continues to improve.
• Whether NTM EV/EBITDA and EV/Sales continue converging toward historical averages.
• Volatility and short-squeeze risk in high-short-interest names such as LYFT, OPEN, WW, DUOL, and TTD.
• Demand changes in digital advertising, travel/sharing economy, e-commerce, and video game sub-sectors.