[BT Financial Analyst] Netflix's stock price plummets again, with analysts suggesting that reversing the trend through its gaming business will require sustained investment.

$Netflix (NFLX.US)$Netflix's stock price dropped another 7%, with analysts stating that for Netflix's gaming business to reverse the decline in subscriber numbers, it needs to significantly increase spending and continue investing.

Recently, the stock of leading video streaming company Netflix fell another 7%, marking another rough day on Wall Street. In fact, it's hard to believe that this former market darling has already dropped nearly 75% from its peak, approaching $701 per share.

The former FAANG growth stock currently trades at a forward P/E ratio of 16.6, its lowest level in five years. This isn't just cheap—it signals a potential value trap. The company has delivered weak results for two consecutive quarters, suggesting the start of a broader trend. The recent surge in subscription cancellations may well be the beginning of a wave.

There's no doubt that competition in the SVOD (streaming video on demand) market has been intensifying for years. Coupled with the pandemic-driven surge in demand, the impact of inflation, and the risk of a U.S. recession, this spells a perfect storm for Netflix.

The real question in investors' minds is whether the sell-off has gone too far. Look at Wall Street, and it's clear that analysts believe the plunge in Netflix stock is overblown.

Has the market misjudged Netflix stock, or does the recent decline in subscribers signal the start of something much worse?

Despite all the headwinds, and things could get worse, I remain bullish on Netflix. The multiple is at an all-time low, and whether you like it or not, Netflix remains the leader in this space, even as competitors vie for a piece of the action.

Furthermore, I believe there's a reason why CEO Reed Hastings is pivoting the company toward video games. Netflix plans to launch about 50 video games by the end of the year, which will undoubtedly enhance its value proposition.

However, I still believe that Netflix is only dabbling in the gaming space, and it needs to make a splash amid declining user numbers to regain investor confidence.

Games are unlikely to prevent user churn.

Netflix is unlikely to take anything away from its video content spending. The battle for video streaming continues, and content will remain king. Although Netflix may experience occasional content shortages (we all want the next Squid Game–level must-watch series), a large library of video games could help prevent consumers from hitting the "unsubscribe" button.

There's no doubt that Netflix isn't as sticky in a more competitive environment. While high inflation and expectations of a recession may have contributed to the recent decline in subscriber numbers, I do believe Netflix needs to improve its user-retention factors.

Unfortunately, if Netflix's gaming business is to reverse the decline in subscriber numbers, it will need to really open its wallet and keep investing.

The company's mobile gaming lineup may appeal to some. However, for its gaming service to compete with a company like Microsoft, it will need to create a major buzz. Microsoft's Xbox Game Pass is essentially the Netflix of the video game world. It boasts a vast library of AAA titles, offering tremendous value to users.

Netflix is lagging behind in the gaming race.

While mobile gaming is a good start, Netflix may need to acquire a multi-billion-dollar video game developer to realize its ambitions.

In fact, the issue isn't the technology behind game streaming. There are already plenty of game-streaming platforms available today.

More importantly, it's the quality of the content on these platforms. Unless Netflix acquires a gaming giant, it's hard to imagine Netflix catching up in the video game space.

For now, I'm skeptical that gaming can save the stock. Netflix is pouring money into something that could have been used to make a show worth watching.

Can cracking down on "account hijacking" stem the bleeding?

Netflix will attempt to convert free users into paying ones. In theory, these efforts should help alleviate recent pressures. However, I don't think such a move will impress its millions of free users, some of whom may not be able to afford a paid subscription.

For now, I don't think the crackdown on password sharing will do anything to reverse the user trend in the long run. At the end of the day, Netflix needs to offer consumers more value to keep them coming back, rather than chasing short-term fixes.

Wall Street Views

On Wall Street, Netflix stock is rated as Hold. Of the 39 analyst ratings, 8 are Buy, 28 are Hold, and 3 are Sell.

Netflix's average price target is $299.93, implying 65.4% upside. Analysts' price targets range from a low of $235 per share to a high of $405 per share.

Summary

Netflix has become quite a perplexing story. The company appears to be losing subscribers and is struggling to heal the wounds. For now, with the U.S. economy heading into a recession, video games are unlikely to turn around Netflix's situation. Moreover, cracking down on account-sharing and raising prices can at best only alleviate short-term pressure.

Looking ahead, consumer spending may decline. Even so, the company still needs to continue making significant investments in video content. If Netflix is serious about developing its video game business, it should consider making major moves in mergers and acquisitions.

There is no easy answer for Netflix. However, the depressed valuation seems to suggest that Netflix's end is near. In fact, the company has the means to re-stimulate user growth.

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