Jefferies recommends a selective approach to internet stocks in 2026, citing heightened AI infrastructure spending and rising operational costs that are eroding margins across the sector. The firm highlights specific companies facing profitability challenges despite strong revenue growth.
- AI-related capital expenditures in internet sector rose 64% from 2023 to 2025
- Average operating margin decline of 12% across major internet firms in 2025
- Top internet firms now spend $18B annually on AI infrastructure
- EBITDA margins projected to fall 15%–20% for non-scaling content platforms
- R&D and capex growth in internet sector: 35%–45% YoY in 2025
- Internet ETFs down 4.3% over the past month amid margin concerns
Jefferies has issued a cautious outlook for internet stocks in 2026, warning investors to adopt a highly selective strategy due to intensifying cost pressures and the high capital demands of AI integration. The firm notes that while AI-driven innovation remains a growth catalyst, the rapid deployment of large language models and compute-heavy infrastructure is significantly increasing operating expenses, particularly for cloud and content platforms. Key metrics underscore the concern: companies in the internet sector are seeing R&D and capital expenditures rise by 35% to 45% year-over-year, with some platforms reporting a 12% decline in operating margins despite 22% to 28% top-line growth. Notably, major internet firms have increased their annual AI-related spending to an average of $18 billion, up from $11 billion in 2023, with little immediate return on investment in earnings per share. The impact is uneven across the industry. Firms with diversified revenue streams and strong cash flow—such as those with dominant e-commerce or subscription-based models—appear better positioned to absorb costs. In contrast, pure-play digital advertising platforms and smaller content-driven companies face sharper margin compression, with some forecasting a 15% to 20% drop in EBITDA margins if current trends continue. Market reaction has been mixed, with internet sector ETFs down 4.3% in the past month, while select high-margin tech stocks in AI infrastructure—like semiconductor providers and cloud infrastructure vendors—have seen modest gains. Analysts caution that the current environment favors companies with scalable models, high switching costs, and proven monetization strategies.