Market divergence and valuation dislocation: Is the North American internet sector's "cheapness" just an illusion?

According to reports from Zhihu Finance APP, Morgan Stanley's latest North American Internet Industry Weekly shows that last week the overall Internet sector rose by about 1%, while during the same period the S&P 500 fell by 1% and the Nasdaq Index rose by 1%. There was significant divergence within the sector: digital advertising led the gains, while e-commerce, travel, and the sharing economy came under widespread pressure. The bank maintains its “attractive” view of the North American Internet industry and notes that if stock-based compensation (SBC) is viewed as a cash expense, the real valuation of the sector is not as cheap as it appears.

Market Review: Digital advertising leads, e-commerce and sharing economy under pressure

Last week, the digital advertising sector performed the strongest. Google (GOOGL.US) and Meta (META.US) rose by approximately 3.3% and 2.7%, respectively, driving the market cap-weighted average increase in the digital advertising sector to 3.1%. However, Snap (SNAP.US), Pinterest (PINS.US), and Reddit (RDDT.US) fell by 2.6%, 2.4%, and 4.4%, respectively.

The e-commerce sector's market cap-weighted average fell by 1.1%, but there was clear internal divergence: Amazon (AMZN.US) fell by 1.2%, while eBay (EBAY.US) and WW International (WW.US) rose by 3.8% and 18.9%, respectively.

The travel sector was under pressure, with Booking (BKNG.US) down 3.5%, Expedia (EXPE.US) down 0.5%, and Airbnb (ABNB.US) down 2.3%.

The sharing economy sector also weakened overall: Uber (UBER.US) fell by 1.6%, DoorDash (DASH.US) fell by 4.5%, Maplebear (CART.US) fell by 6.9%, and Lyft (LYFT.US) fell by 1.4%.

Divergence in Valuation Metrics: Is “cheap” only an illusion?

Morgan Stanley points out that there is significant divergence in valuation metrics for the current North American Internet sector. Overall, the sector's next twelve months (NTM) EV/EBITDA is 12.4x, which is 9% and 17% lower than its five-year and ten-year historical averages, respectively; however, NTM EV/Sales is 4.7x, which is 14% and 15% higher than the five-year and ten-year historical averages, respectively.

Among large-caps, based on 2026 EPS estimates, the P/E ratios of Amazon, Google, and Meta are about 19x, 17x, and 21x, which are 35%, 33%, and 7% lower than the average over the past twelve months. As of September 18, the NTM EV/EBITDA for these three companies were 10.8x, 15.0x, and 10.4x, respectively. Compared to the two-year averages, Amazon is 15% lower, Google is 6% higher, and Meta is 16% lower; compared to the three-year averages, Amazon is 17% lower, Google is 11% higher, and Meta is 14% lower.

This means that from the EBITDA perspective, North American Internet companies are still valued below historical averages; but if looking at sales multiples, the sector overall does not appear cheap.

The report also analyzed the impact on Internet company EV/EBITDA valuations when treating stock-based compensation (SBC) as a cash expense. The results show that if SBC is considered a cash cost, the valuation multiples for most subsectors would increase significantly.

Specifically, the median for the digital media sector rises by about 38% (excluding Snap); for the e-commerce sector, the median rises by about 26%; for the video games sector, the median rises by about 13% (excluding Roblox and Unity); for the travel, sharing economy, and property technology sectors, the median rises by about 51% (excluding Zillow).

This adjustment means that if investors take a more conservative view of the impact of stock-based compensation on real cash flow, the valuations of many Internet companies are not as cheap as they appear on the surface.

On the trading side, there was clear divergence in short interest: Opendoor (OPEN.US), The Trade Desk (TTD.US), and WW International (WW.US) had the highest proportion of short positions, while large platforms like Amazon, Meta, and Google had the lowest, indicating little disagreement in the market regarding the leaders.