Key insights
- Internet stocks have underperformed the broader market, with a 18% average decline in 2026. Factors cited include stretched valuations, AI disruption risks, high
Investing.com - A sharp selloff across internet equities this year has created an attractive entry point for investors, with major hyperscalers poised for potential free cash flow inflection points over the next 3 to 12 months, according to a research note from Evercore ISI.
The 19 large-cap internet stocks covered by Evercore ISI have dropped by an average of 18% in 2026, severely underperforming broader market benchmarks, with the S&P 500 up 14% and the Nasdaq Composite rising 19%.
Evercore ISI Senior Managing Director Mark Mahaney attributed the sector’s underperformance to six primary "Bear Market Factors":
Stretched Valuation Exits: Elevated valuations coming out of 2025 following a three-year bull run for internet stocks.
AI Disruption Risks: Terminal value debates and artificial intelligence risk fears that have hit names like Booking Holdings Inc. Expedia Group Inc., Shopify Inc., and Uber Technologies Inc.
Capex Intensity: The sheer scale of the AI investment cycle at major hyperscalers, where capital expenditures as a percentage of revenue are likely to increase further in fiscal 2027 and potentially 2028.
Middle East Energy Shock: Inflationary headwinds from the ongoing war in Iran, which have raised costs and dampened consumer demand across a cyclical sector.
IPO Supply Expectations: Investor capital reallocation to create capacity for an incoming generation of mega-cap internet public offerings.
"Muse Risk": The emergence of autonomous AI agents as primary consumer interfaces, which threatens to weaken incumbent platforms’ control over customer relationships, ad monetization, and transaction take rates.
Despite pervasive market skepticism that massive AI capex will cause negative free cash flow (FCF) at Amazon.com Inc., Alphabet Inc., and Meta Platforms Inc over the next two to three years, Evercore ISI argued that Wall Street consensus is overly pessimistic.
While acknowledging that 2027 capital expenditure estimates for Amazon and Meta still skew higher, Evercore highlighted that upward revisions to revenue and operating income could easily offset spending increases.
"We see upward estimates revisions for Revenue and Operating Income as a significant possibility for the Hyperscalers," Mahaney wrote, noting that positive FCF inflection points over the next 3 to 12 months could serve as a major catalyst to "right market wrongs".
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