Morgan Stanley — Internet Sector (North America): When... Morgan Stanley — Int… · @2030FY_X · TwKit

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Morgan Stanley — Internet Sector (North America): When... Morgan Stanley — Internet Sector (North America): Where Are Current Trading Levels? Repricing Into the Q3 Earnings Window I. Sector Trading Performance During the Q3 Earnings Window As the North American internet sector enters the peak Q3 earnings disclosure period, the sector posted a market-cap-weighted drawdown of about 4% for the week, significantly underperforming the S&P 500 (roughly flat) and the Nasdaq 100 (down about 1%). Divergence among leading names intensified: META fell about 9% for the week, GOOGL fell about 6%, while AMZN fell only about 1%; CART rose 13% against the trend, RDDT fell 8%, and BKNG fell 5%. Implied narrative: the market is shifting from pricing the “AI capex story” to pricing the “pace of delivery and free cash flow quality,” and the valuation anchors of leading names are loosening. II. Leader Valuation Levels: Earnings Multiples Below Historical Midpoints, But Not Broadly Cheap As of the October 23 reference date, AMZN, GOOGL and META trade at about 21x, 21x and 19x 2027E EPS, respectively, representing discounts of about 18%, 14% and 2% versus their respective TTM average valuations. On NTM EV/EBITDA: • AMZN at about 10.4x, an 18%/20% discount to its 2-year/3-year averages; • GOOGL at about 13.2x, an 8%/3% discount to its 2-year/3-year averages; • META at about 9.8x, a 20%/19% discount to its 2-year/3-year averages. Conclusion: AMZN and META are in historical discount ranges, while GOOGL is relatively resilient; the three mega-caps are not priced in sync, with the market showing greater tolerance for Google’s AI search and cloud resilience and imposing stricter requirements on META’s capex and on the returns from AMZN’s fulfillment/cloud investment. III. Sector-Level Multiple Divergence: EV/EBITDA Discount vs EV/Sales Premium Sector NTM EV/EBITDA is broadly at a 15%–23% discount to its 5-year and 10-year averages, but NTM EV/Sales is still at a 7%–8% premium to its 5-year and 10-year averages. Identity logic: EV/Sales = EV/EBITDA × EBITDA margin. Expensive revenue multiples and cheap profit multiples essentially mean the market is still betting on continued margin expansion. If AI capex drags on ROI or SBC continues to swell, this premium is fragile. IV. SBC Adjustment: The Apparent “Cheapness” Is Significantly Weakened If stock-based compensation is treated as a cash expense and added back to costs to recalculate EV/EBITDA: • The digital media median rises by about 38% (excluding SNAP); • The e-commerce median rises by about 26%; • The gaming median rises by about 13% (excluding RBLX, U); • The travel/ride-sharing/proptech median rises by about 51% (excluding Z). Implication: overlooking SBC overstates the margin of safety in the “EBITDA discount”; on a cash-cost basis, the sector’s true multiples are not cheap, especially for the sharing economy and travel platforms. V. Sub-Sector and Stock-Level Sentiment Structure • Digital advertising: META/GOOGL pullbacks stem from concerns over capex and monetization pace; RDDT is high-volatility with high short interest (about 15.7% short interest ratio); • E-commerce: AMZN is relatively resilient; CHWY, EBAY and ETSY have contributed positively year to date; • Sharing and food delivery: CART is strong; UBER/DASH are pressured by delivery unit economics and regulatory discount; • Travel: BKNG, ABNB and EXPE are pressured by consumer sensitivity and expectations of AI agent booking substitution; • Most shorted names: OPEN, WW, LYFT, YELP and TTD lead; least shorted: AMZN, GOOGL, META. VI. Core monitoring framework (key variables to verify in the Q3 report) 1. Revenue quality: ad load, cloud growth, third-party share of retail; 2. Margins: whether AI infra (infrastructure) spending is translating into gross margin expansion; 3. Cash flow: how long FCF (free cash flow) stays negative and the capex payback period; 4. Compensation structure: whether SBC as a percentage of revenue keeps rising; 5. Shareholder returns: the offsetting effect of buybacks and dividends on dilution. VII. Key ratings in the coverage universe Overweight: GOOGL, AMZN, META, DASH, CART (Equal-weight), APP, BKNG, RBLX, TTWO, U, CHWY, EBAY, GRND, etc.; Equal-weight: SNAP, PINS, LYFT, ABNB, TTD, Z, MTCH, etc.; Underweight: EXPE, YELP, PTON. Conclusion: This is not an "internet is cheap across the board" trade, but a three-way split of "profit multiple discount + revenue multiple premium + SBC distortion." The real pricing power in the Q3 report lies not in top-line growth, but in whether AI spending can be validated by margins and FCF. Among the mega-caps, AMZN/META offer valuation-recovery upside, while GOOGL defends on a quality premium; if SBC and capex (capital expenditure) get out of control, the sector discount will quickly turn into a de-rating.

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