Written by: Rita
The summer rally in the internet sector concluded amidst volatility. Over the past week, the average performance of internet companies covered by Morgan Stanley fell by 2%, moving in sync with the S&P 500 and Nasdaq indices. However, individual stock performances varied significantly, with Meta dropping approximately 7%, Amazon falling about 2%, and Google remaining largely flat.
On August 25th, Morgan Stanley released a valuation dynamics report for the internet industry, providing a detailed breakdown of the valuation positions of the three giants. Amazon currently trades at 19 times its 2026 estimated P/E ratio, representing a 36% discount to its historical average; Google trades at 17 times, a 36% premium; and Meta trades at 17 times, a 24% discount. Google's valuation premium stands in stark contrast to Meta's deep discount. Morgan Stanley maintains an "Attractive" rating for the internet sector.
This summer, the market's pricing logic for these three companies has seen a fundamental divergence. AI capabilities are becoming the core variable driving valuation differentiation.
Google's Valuation Premium Coexists with Meta's Deep Discount
Google is the only company among the three giants trading above its historical average valuation. On an EV/EBITDA basis, its current multiple of 15.1x represents an 8% premium to the 2-year average and a 12% premium to the 3-year average.
Google's valuation premium stems from the market's reassessment of its AI capabilities. Upward revisions for external TPU sales (Morgan Stanley previously raised its revenue per GW assumption from $20 billion to $27 billion), iterations of the Gemini model, and expanding margins in its cloud business collectively support the valuation. The market is willing to price in AI-driven growth ahead of time.
Meta's valuation is moving in the opposite direction. Its current forward EV/EBITDA multiple of 8.7x represents a 30% discount to the 2-year average and a 28% discount to the 3-year average. Although Meta is making good progress in monetizing its AI advertising tools, market concerns about competition in social media advertising continue to suppress its valuation. Amazon sits in the middle, with a current forward EV/EBITDA of 11.2x, representing discounts of 12% and 14% to the 2-year and 3-year averages, respectively.
Sector Valuations Show Divergence in Pricing for Revenue vs. Profit
Morgan Stanley data shows that the internet sector's current forward EV/EBITDA multiple is 9% below its 5-year average and 16% below its 10-year average. Over the same period, the EV/Sales multiple is 16% above the 5-year average and 17% above the 10-year average. Revenue multiples are expanding while profit multiples are contracting, indicating that the market is raising its requirements for earnings quality.
E-commerce and digital media are the sub-sectors with the most concentrated valuation discounts. The median forward EV/EBITDA for the digital media sub-sector is around 9.6x, with companies like SNAP still operating at a loss. The e-commerce sub-sector's valuation is also under pressure, mainly due to the dual impact of slowing consumer spending and intensifying competition.
SBC Adjustment Reveals True Valuation Pressure
After adjusting for stock-based compensation (SBC) as a cash expense, the true valuation multiples for each sub-sector are significantly higher than the apparent numbers.
The adjusted EV/EBITDA multiple for the digital media sub-sector rises by an average of approximately 36%, the e-commerce sub-sector by about 30%, and the travel & shared economy sub-sector by around 44%. The proportion of SBC in tech companies continues to grow, widening the gap between valuation multiples calculated on cash profits versus those based on reported profits. Solely looking at reported EV/EBITDA may underestimate the true valuation pressure. Recalculating by treating SBC as a cash expense better reflects the actual costs borne by shareholders.
Valuation Recovery Requires Earnings Revisions, Not Just Mean Reversion
Morgan Stanley believes that a recovery in internet sector valuations requires new catalysts. Key variables to monitor in the coming quarters include: the release cadence and market acceptance of Google's Gemini 4, whether Amazon AWS's growth rate stabilizes, Meta's progress in monetizing AI advertising tools, and the ongoing impact of changes in the interest rate environment on high-valuation growth stocks.
In the near term, overall sector valuations are within a reasonable range. Discounts exist in e-commerce and digital media, but the discount itself is not a buy signal. Valuation recovery needs to be driven by upward revisions to earnings expectations, not merely mean reversion.
Disclaimer
This article is Chaoxiang Research's organization and interpretation of a third-party brokerage research report (Morgan Stanley, August 25, 2026), combined with publicly available market information. The ratings, target prices, earnings forecasts, and related judgments cited in the text are the views of that brokerage's analyst, representing solely the position of their affiliated institution. They do not represent the views of Chaoxiang Research nor constitute any investment advice.
The market carries risks; decisions should be made independently. This article should not be used as a basis for trading any securities.
