Divergence in market performance, valuation disconnectis the North American internet sector's "cheapness" merely an illusion?

Title context: Divergence in market performance, valuation disconnectis the North American internet sector's "cheapness" merely an illusion? Text: Morgan Stanley's latest North American internet industry weekly report shows that last week the internet sector rose about 1% overall, while the S&P 500 and Nasdaq fell 1% and rose 1%, respectively, over the same period. Performance within the sector diverged markedly: digital advertising led gains, while e-commerce, travel, and the sharing economy generally came under pressure. The bank maintained its "attractive" industry view on the North American internet sector and noted that if stock-based compensation (SBC) is treated as a cash expense, the sector's true valuation is not as cheap as it appears. Reviewing market performance: digital advertising led gains, e-commerce and the sharing economy came under pressure Last week, the digital advertising sector performed strongest. Alphabet Inc. Class C (GOOGL.US) and Meta (META.US) rose about 3.3% and 2.7%, respectively, driving the digital advertising sector's market-cap-weighted average gain to 3.1%. However, Snap (SNAP.US), Pinterest (PINS.US), and Reddit (RDDT.US) fell 2.6%, 2.4%, and 4.4%, respectively. The e-commerce sector fell 1.1% on a market-cap-weighted average, but internal divergence was clear: Amazon.com, Inc. (AMZN.US) fell 1.2%, while eBay (EBAY.US) and WW International (WW.US) rose 3.8% and 18.9%, respectively. The travel sector came under pressure, with Booking (BKNG.US) down 3.5%, Expedia (EXPE.US) down 0.5%, and Airbnb, Inc. Class A (ABNB.US) down 2.3%. The sharing economy sector also weakened overall, with Uber Technologies, Inc. (UBER.US) down 1.6%, DoorDash (DASH.US) down 4.5%, Maplebear (CART.US) down 6.9%, and Lyft (LYFT.US) down 1.4%. Valuation metrics diverge: is "cheap" just an illusion? Morgan Stanley pointed out that the North American internet sector's valuation metrics are currently diverging markedly. Overall, the sector's next-twelve-months (NTM) EV/EBITDA is 12.4x, 9% and 17% below its 5-year and 10-year historical averages, respectively; but NTM EV/Sales is 4.7x, 14% and 15% above its 5-year and 10-year historical averages, respectively. Among large caps, based on 2026 EPS, the P/E ratios of Amazon.com, Inc., Alphabet Inc. Class C, and Meta are approximately 19x, 17x, and 21x, respectively, 35%, 33%, and 7% below their trailing 12-month averages. As of September 18, their NTM EV/EBITDA stood at 10.8x, 15.0x, and 10.4x, respectively. Compared with 2-year averages, Amazon.com, Inc. is 15% lower, Alphabet Inc. Class C is 6% higher, and Meta is 16% lower; compared with 3-year averages, Amazon.com, Inc. is 17% lower, Alphabet Inc. Class C is 11% higher, and Meta is 14% lower. This means that from an EBITDA perspective, North American internet companies' valuations remain below historical averages; but from a sales multiple perspective, the sector's overall valuation is not cheap. The report also analyzed the impact on internet companies' EV/EBITDA valuations of treating stock-based compensation (SBC) as a cash expense. The results show that if SBC is treated as a cash cost, valuation multiples for most sub-sectors rise markedly. Specifically, the median for the digital media sector rises about 38% (excluding Snap); the median for the e-commerce sector rises about 26%; the median for the video game sector rises about 13% (excluding Roblox and Unity); and the median for travel, sharing economy, and real estate technology rises about 51% (excluding Zillow). This adjustment means that if investors take a more conservative view of the impact of stock-based compensation on true cash flow, many internet companies' valuations are not as cheap as they appear on the surface. On the trading side, short interest diverges markedly: Opendoor (OPEN.US), The Trade Desk (TTD.US), WW International (WW.US), and others have among the highest short interest ratios, while large platforms such as Amazon.com, Inc., Meta, and Alphabet Inc. Class C have the lowest short interest ratios, indicating relatively little disagreement in the market about the leaders.