Internet Stocks Need AI Profits In 2026, Analyst Says

Core Viewpoint - Internet stocks are facing challenges entering 2026, having underperformed the broader market in 2025 due to operational missteps, increased competition from generative AI, and inconsistent margins, necessitating companies to demonstrate real AI-driven growth and profitability [1][2]. Market Performance - Internet stocks lagged behind both the S&P 500 and the Russell 2000 in 2025, attributed to operational missteps and competitive threats from generative AI [2]. - Consumer sentiment remains approximately 28% lower year over year, influenced by recent government shutdowns and tariff actions, despite a 5% month-over-month improvement in early December [3][2]. 2026 Outlook - A stable consumer environment alone will not sustain valuations in 2026; companies must show stronger execution and tangible progress in AI monetization and profitability [4]. - In the education sector, deeper integration with AI platforms is expected to diversify traffic sources, alongside scaling AI-enhanced learning products [5]. AI Adoption and Impact - AI-driven traffic is becoming significant, accounting for about 1% of Etsy's total traffic, with industry-wide AI referrals increasing by approximately 1,200% year over year in October [6]. - AI-driven traffic has a conversion rate that is about 16% better than non-AI traffic [6]. Company-Specific Insights - For Duolingo, investor sentiment is negative, but early 2026 bookings and adjusted EBITDA guidance could indicate potential upside; the company needs to achieve over 20% bookings growth and stabilize daily active users [7]. - Etsy shows mixed sentiment, but sustained gross merchandise sales growth could mitigate margin pressures from investments in Depop, supporting stronger share performance in 2026 [8]. - Coursera has been upgraded to Overweight, with expectations that consensus estimates underestimate improving execution across product, go-to-market, and profitability [8]. - The pending merger with Udemy is anticipated to create a more competitive AI-skills platform and accelerate AI product development [9]. Ratings Summary - Duolingo and Coursera are rated Overweight, while Etsy and Udemy are rated Neutral; Nerdy Inc. and Chegg, Inc. are rated Underweight [9].