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Netflix stock sinks after reported ad target miss as analysts warn of 'competitive disadvantage'

Netflix (NFLX) stock closed Thursday's trading session down nearly 9%, the biggest intraday drop since April, after a new report from Digiday said the streaming giant is falling short on viewership guarantees it made to advertisers for its new ad-supported tier.

According to Digiday, which cited five agency executives, Netflix is now allowing ad buyers to take their money back after missing viewership targets. The company reportedly only delivered around 80% of the expected audience.

Netflix's drop also came during a challenging day for the broader market, with the Nasdaq falling 3% and the S&P 500 losing 2.5%.

Yahoo Finance reached out to Netflix for comment but did not immediately hear back.

Following this news, some Wall Street analysts argue the company's ad-supported tier is still early days.

"Netflix with ads only got off the ground six weeks ago," Macquarie analyst Tim Nollen wrote in a new note published Thursday. "We believe the service will succeed by drawing users from higher ad-free tiers to this lower-price tier rather than adding new subscribers, but it could take a couple of years to build a large-enough user base to become a meaningful destination for advertisers."

Bloomberg Intelligence added: "Though macroeconomic clouds are looming over the ad industry, the company’s failure to meet viewership guarantees is more likely due to a lack of supply rather than weak demand."

Still, one industry analyst said in a note on Wednesday Netflix will ultimately be a "loser" in the streaming wars.

"The US OTT market is mature and next steps are clear — churn minimization in the US, and global expansion to drive revenue growth," Needham analyst Laura Martin wrote in a note to clients. "The streaming wars are essentially over."

"We see Netflix at a competitive disadvantage in both these tactical imperatives because it doesn't own a bundle to lower churn in the US, and it has largely saturated its offshore [total addressable market] already," Martin added. "By implication, we expect NFLX to lose subs to competitors, and would approach NFLX shares with caution."

"Wednesday" (Courtesy: Netflix)
"Wednesday" (Courtesy: Netflix)

Martin argued the Disney bundle, which includes Hulu and ESPN, along with Amazon Prime's SVOD bundle and YouTube TV's AVOD bundle are the true winners and "can not be displaced."

Speaking to Yahoo Finance Live on Wednesday, Martin said, "70 to 80% of the total economics [in streaming] will end up in those three companies, which is what we've seen in digital markets."

"All those bundles are going to take share from Netflix, which can't bundle because it doesn't own anything else," Martin added.

Martin suggested Netflix could better position itself if it sold to a bigger conglomerate. The analyst previously suggested its ad-supported partner, Microsoft (MSFT), as a possible purchaser.

Shares of Netflix, down about 50% since the start of the year, have climbed roughly 65% over the past six months as other industry watchers see content improvements decreasing churn in 2023.

Alexandra is a Senior Entertainment and Media Reporter at Yahoo Finance. Follow her on Twitter @alliecanal8193 and email her at alexandra.canal@yahoofinance.com

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