'We see breakout hits as a must for the stock to work again,' Wells Fargo analysts said as they cut their rating on shares of the streaming platform

Netflix's stock is down around 23% so far this year amid concerns about engagement.

As Netflix extends its reach into podcasts, games and live TV, Wells Fargo analysts say it has sacrificed what once made it great: original shows and movies.

With those concerns top of mind, analysts at the firm on Friday downgraded shares of the streaming giant to underweight - the rough equivalent of a sell rating - from equal weight. Shares of Netflix $(NFLX)$ slid 4.6% on Friday.

"If the opportunity is to recast [Netflix] into a broader content hub, the risk is missing the watercooler originals," the analysts said. "We see breakout hits as a must for the stock to work again."

Netflix's stock is down around 23% so far this year. Shares are currently trading at around $72, well off highs of more than $130 reached last year.

The analysts said that subscribers were still watching more than an hour of Netflix a day. But without the draw of series like "Stranger Things" and "The Queen's Gambit," which rank among the platform's most watched shows, the analysts were worried about weakening engagement trends on the platform.

They said Netflix viewership stood at around 1.6 hours a day per subscriber in the first half of the year. But they estimated those trends represented a roughly 8% drop from the same period in 2023, after adjusting for a password-sharing crackdown and geographical mix.

Moreover, they estimated that viewership for Netflix's top 100 original titles, based on hours watched per day by subscribers, fell 3% during the first half of this year, as compared with the same period last year.

Last year, some analysts declared Netflix to be the winner of the streaming wars - and deemed it a company more prepared to go head to head with YouTube - as its rivals consolidated and struggled to make their own streaming businesses profitable. But this year, Wall Street has been concerned with waning viewer interest and resistance to increases in Netflix's subscription prices.

In July, Netflix said it would publish viewership data less frequently - raising bigger concerns about engagement. The company forecast a 10% increase in content spending this year as it chases live entertainment and shorter videos.

Management also said that not all viewing hours were created equal. Things like live programming, which don't account for a lot of viewers, still bring in ad revenue and signups, they said.

From here, Netflix faces difficult decisions that could make for a more difficult narrative for investors, according to the Wells Fargo analysts. The company could reset its content-spending plans, which would take time; license live-sports broadcasts; or return to mergers and acquisitions after abandoning its bid for Warner Bros. Discovery $(WBD)$, which cleared the way for an offer from Paramount Skydance $(PSKY)$.

All of that, the analysts said, made for a "messier" Netflix story. But they noted that the company has "time & again delivered unexpected break-out hits."

-Bill Peters