Netflix (NFLX.US) downgraded twice in one week: HSBC cites YouTube competition, Wells Fargo concerns about engagement and content strategy

Zhitong Finance APP reported that HSBC analyst Mohamed Kallouf downgraded the rating of streaming giant Netflix (NFLX.US) from "Buy" to "Hold," and lowered the target price by 21% to $76. He believes that the growth of Google's (GOOG.US, GOOGL.US) YouTube comes at the expense of Netflix, and Netflix's user engagement is unlikely to recover in the short term.

Kallouf stated in the report: "In our view, YouTube benefits from the decline in viewership of Netflix original content. The strategic shift further intensifies the competition." He mentioned that YouTube is committed to providing creators with direct funding, higher revenue shares, and prioritized marketing in exchange for exclusive content.

In addition, YouTube is improving its features to mimic Netflix-style series. Kallouf pointed out that these moves further blur the boundaries between video-sharing platforms and traditional scripted streaming, and could raise the cost for Netflix to build a competitive creator content library.

Kallouf also said that due to streaming fatigue and the "waning appeal of original content," Netflix's "industry-leading" subscriber retention rate is facing increasing headwinds. This year, the number of Emmy Awards Netflix has won is notably low—the lowest since 2016; user ratings on Rotten Tomatoes for its latest series are also down by 7% compared to previous seasons.

He stated in the report: "User engagement is crucial because it improves retention, enhances pricing power, and is closely watched by advertisers. We are now seeing downward pressure on user retention due to the waning appeal of original content, while consumer streaming fatigue is also intensifying."

This is the second time in less than a week that Netflix's rating has been downgraded. Wells Fargo previously downgraded Netflix from "Hold" to "Underweight," cutting its target price from $80 to $57, citing concerns over declining user engagement and content strategy putting pressure on margins.

As of Tuesday's close in the US stock market, Netflix closed down 1.64% at $72.16. The stock has fallen 23% so far this year.