1 Wall Street Analyst Just Called Netflix a Sell. Is It Time To Dump the Streaming Stock?

2026 is nearly at the three-quarter mark, and Netflix (NASDAQ:NFLX) is on track for only its second losing year in the last decade.

The stock tumbled in 2022 in the post-pandemic reopening as consumer habits shifted away from at-home activities like streaming. With the stock down 23% year-to-date, Netflix could have its first losing year in an up year for the S&P 500 since 2014.

While the streamer has continued to deliver solid growth, the stock has been victimized by slowing engagement, the lack of a big hit, a rising threat from YouTube, and a lofty valuation heading into the year.

To add insult to injury, Wells Fargo last week became the first major sell-side firm to downgrade Netflix to a sell-equivalent, rating it underweight and lowering its price target to $57 from $80. This week, HSBC followed that up by cutting its rating to hold and lowering its price target from $96 to $76.

Image source: Netflix.

Why Wall Street is souring on Netflix

Wells Fargo pointed to a concerning engagement trend, estimating hours per subscriber in the second half of the year were set to fall 4%, and for the Top 100 Netflix Originals, it now sees a 21% decline in viewing hours. If that's true, it's a clear sign that Netflix's economic moat is diminishing, as streamers primarily compete on original content, and just one hit show can drive millions of sign-ups and help lower churn.

HSBC, meanwhile, said YouTube is gaining market share from Netflix and noted the disappointing performance of Netflix Originals.

Finally, the prediction market Kalshi is forecasting that Netflix app downloads will fall 37% in September from a year ago, signaling a drastic decline in new users.

The YouTube rivalry is heating up

Longtime Netflix CEO Reed Hastings consistently said YouTube was the company's biggest competitor rather than another streamer or cable TV, and that statement has become truer over the years. Both companies are becoming more like the other one.

YouTube launched a "Shows" feature similar to Netflix's brand of serialized television, while Netflix is rolling out short- and medium-length videos in the style of YouTube. It's also been poaching top YouTube talent, and YouTube is fighting back by offering millions to top creators to be exclusive to the platform.

YouTube now leads streaming video time in the U.S. with a 14.2% share, according to Nielsen, up 80 basis points from a year ago, while Netflix is bringing up second place with just 7.8%, down 100 basis points, showing Netflix is losing significant market share.

Is this just a trend?

Netflix has been through plenty of peaks and valleys over its history, and the streamer has a strong track record of coming out on top.

Slowing growth due to a weak content slate is a disappointment, but it's not out of the ordinary for Hollywood. Movies and TV shows turn out to be busts all the time, and studios go through cycles of hits and misses.

Netflix should eventually find more hits, and there's no clear sign that its production flywheel is broken. Meanwhile, the company is making a smart move with its expansion into sports, and the advertising tier has been a winner.

Netflix will have to return to engagement growth in order for the stock to recover, and that might take time. However, the company is still delivering double-digit growth with strong operating margins. Investors are right to be disappointed with this year's slide, but there's no reason to be alarmed. One bad year does not make for a broken stock, especially in the entertainment industry.

Wells Fargo is an advertising partner of Motley Fool Money. HSBC Holdings is an advertising partner of Motley Fool Money. Jeremy Bowman has positions in Netflix and Wells Fargo. The Motley Fool has positions in and recommends Netflix. The Motley Fool recommends HSBC Holdings. The Motley Fool has a disclosure policy.