So, React is just a view library. It's made to map state to DOM changes. Except it's not just a view library, because if you write an app with React, you are writing a React app. You slice and dice your view up and put them into React components. Now, since you want to use your React components on the server and not slice and dice them up again in another view library, you morph that DOM-manipulating lib into a templating engine that generates static HTML. Except you call it "server side rendering", because "templating engine" sounds so 2010 and "static site generation" is also not the right term, because the output isn't a static HTML page, but can change with every page request. Of course, the "React" part of React is completely ditched in SSR, because you don't need to continuously modify the DOM based on your state. React on the server is what PHP templates have been doing forever. Outputting HTML in PHP is "view = f(state)". We've come full circle.
I sometimes wonder if younger web devs even understand that SSR isn't, like, really rendering a page on the server, but basically means "we produce frickin HTML like we've been for the last 30 years, except our tools are now 10x as complex to such a point that we don't understand them anymore", because 90% of our view library does nothing on the server, because, you know, there is no DOM. There is only HTML as a string send over HTTP.
Having said that: Your analysis is completely correct. The discussion really is orthogonal and I'm not sure I see the point in rendering web components on the server, since most web components benefit from interactivity through JS. If I merely encapsulate a bunch of HTML tags, I can ditch the custom element entirely and send the HTML tags down the wire by themselves.