Morgan Stanley Research Report Analysis: GOOGL, META True Valuations Undervalued by Over 30%, AI Monetization Catalyst Poised
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Morgan Stanley Research Report Analysis: GOOGL, META True Valuations Undervalued by Over 30%, AI Monetization Catalyst Poised
The flow of AI capital ultimately depends on monetization, rather than the technology itself.
Navigating Web3 tides with focused insightsBy: Rita
TechFlow Insights
Morgan Stanley points out that GOOGL and META are severely undervalued. Nominal valuations do not look cheap, but after adjusting the accounting treatment for stock-based compensation (SBC), the real valuation is actually undervalued by more than 30%, far below historical levels. Short-term AI capital is waiting on the sidelines, but long-term opportunities are obvious.
Internet stocks have recently weakened. As of June 26, the Internet index fell 6%, Google and Meta both fell more than 4%, and Snap fell 5.4%. At the same time, travel and sharing economy stocks rose 4.9% and 6.0% respectively. The problem reflected behind this divergence is very direct: where should capital flow in the AI era?
Morgan Stanley's judgment is that Internet giants have not yet fully proven their profitability in the AI era, so the market has temporarily invested money in safer travel and sharing economy companies. But this judgment may be too pessimistic.
Two Worlds of Valuation
Internet companies face a statistical trap. Looking at nominal EV/EBITDA, AMZN is 11.0x, GOOGL is 16.1x, and META is 8.9x, which does not look high. But the problem lies in the fact that the EBITDA calculation method of these companies implies an assumption: the stock portion of employee compensation should be included in costs.
If following this assumption, the earnings of these companies are severely underestimated. Morgan Stanley's analysis shows that once the accounting treatment is adjusted, treating SBC as cash costs rather than paper costs, the EV/EBITDA multiples of these companies will rise significantly. For example, the adjusted median multiple for digital media companies jumped from 16.3x to 31.1x, a 91% increase. But even so, these multiples are still lower than the five-year average of 31.6x.
In other words, the real valuation of Internet giants is undervalued by the market by more than 30%.
AI Monetization Still Waiting
Morgan Stanley tracked several key indicators. In the data table, the 2026 EPS growth expectations for digital advertising companies (GOOGL, META, SNAP, etc.) are -22%, -11%, and -20% respectively, all negative. This shows that the market has no confidence in the earnings growth of these companies this year. The reason is also clear: large-scale AI infrastructure expenditures have driven up IT costs, and Internet advertisers are still observing return on investment, with no sign of significant increase for the time being.
But this observation period may not be too long. Once the monetization path of AI models becomes clear, such as new advertising forms brought by generative AI, capital will flow in quickly. The high leverage characteristics of digital advertising companies mean that once earnings growth turns positive, the stock price reaction will be fierce. Morgan Stanley's 2027 EPS growth expectation is positive, indicating that analysts believe this turning point will come.
Weak Short-Term, Opportunities Long-Term
Report data shows that the Internet index fell 5.5% in the past week, 10.3% in the past month, 14.2% in the past three months, but rose 14.2% year-to-date. This indicates that the recent sell-off is a short-term technical adjustment, not a trend reversal. In the long run, AI capital must ultimately flow to companies that can truly monetize AI capabilities, and Internet giants are core members of this list.
There are three key catalysts: the launch of AI advertising products and ROI verification; changes in interest rate expectations, Internet companies are very sensitive to interest rates because their growth stories have high requirements for discount rates; repricing of the valuation center, once the market accepts the framework of "valuation after adjusting SBC", the upside space for Internet stocks will be large.
TechFlow Perspective
The smartest part of this Morgan Stanley report lies in using the SBC adjustment angle to pierce a market illusion. Internet companies are priced wrongly by the market, not worthless. This kind of contrarian thinking is common in bottom areas; when the market's pessimistic pricing itself contains opportunities, it is often the best entry point.
It needs to be noted that Morgan Stanley's analysis assumes that SBC should be treated as real cash costs. This assumption is controversial in both academic and practical circles. Some believe that the real cost of stock compensation should be calculated based on the market value at the time of exercise, not the fixed value at the time of grant. This technical detail is important because it directly affects the level of multiples. But even conservatively, taking the median value before and after adjustment, the valuation discount of Internet stocks is still obvious.
The flow of AI capital ultimately depends on monetization, not the technology itself. Internet companies have accumulated years of AI applications in advertising, recommendation, search, and other fields, not starting from zero. Compared to chip manufacturers still worrying about capacity, the problem for Internet companies is just the conversion rate, that is, how to turn AI capabilities into products users are willing to pay for. Once this conversion starts to accelerate, valuation reshaping will be fast.
Disclaimer
This article is an organization and interpretation of third-party brokerage research reports by TechFlow Research. The ratings, target prices, earnings forecasts, and related judgments cited in the text are the views of the brokerage analysts, represent only the position of their affiliated institutions, do not represent the views of TechFlow Research, and do not constitute any investment advice.
The market carries risks; decisions must be independent. This article should not be used as a basis for buying or selling any securities.
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