After being unofficially crowned the winner of the streaming wars, it now has to face a more daunting adversary: Wall Street expectations. Netflix has overcome much worse before in the recent past. Look no further than its disastrous earnings in April 2022, when it reported a decline in subscribers for the first time in 10 years and sparked a stock rout that wiped $50 billion off its market cap in a single day. That led at least nine firms to downgrade Netflix’s stock, only for it to be praised as the dominant streamer by the turn of this new year.

The Street is now singing Netflix’s praises, with BMO rating the stock an outperform, convinced that with the Hollywood strikes over, it will attract the best actors and writers in Hollywood. Bank of America called it a “long-term winner” in a year-end overview of the media industry published in December, while Goldman had it at neutral, seeing its position getting entrenched. But Jason Bazinet of Citi Research issued a downgrade, and as he told Fortune, Netflix’s story is going to get too complicated, especially if the company considers a big acquisition around its long-rumored interest in gaming. 

“If you can explain a story in two lines to your grandmother, that will get a higher multiple,” Bazinet tells Fortune. “As soon as you start mixing up nine different things that can go right or go wrong, people get bogged down, and that ends up hurting the multiple.”

Bazinet was referring to Netflix’s play in video games, but he’s really referring to the curse of too much success. As he tells it, the costs of winning the streaming wars are going to mean Netflix has to spend too much money on content. Sure, its stock is going to go up, he added, but not by as much as the Street thinks.

Netflix did not respond to a request for comment.

Netflix’s position as the leader in streaming wasn’t in question to Bazinet, with the analyst calling it “a well-run company that has executed remarkably well in a highly competitive market.” But that’s not good enough for Citibank: “We no longer find the risk-reward compelling.”  

“The evidence is clear to us and many others that Netflix has ‘won’ the streaming wars,” Bazinet writes, but that came with a huge stock appreciation, from roughly $200 per share in mid-2022 to about $485 per share today. And the market is pricing in a lot more room for it to run.

Citi Research sees more appreciation ahead, to be sure, but not at the rate of its peers on the Street. And missing Wall Street’s expectations tends to hurt a company’s stock price, even if underlying performance remains strong. For example, in the third quarter of 2023, Alphabet grew revenue by 11% to $76.9 billion for the period, but missed analyst expectations on its closely watched cloud segment, causing the stock to fall 8.8%. 

Like any analyst, Bazinet has to decide whether to get out of a good stock when it’s at its peak and avoid the downslide, even if the consensus is the opposite. “I could be wrong,” Bazinet says. “But my intuition is, that is the time when you step off the gas and stop accumulating shares.” 

The cost of winning the wars

Those with Bazinet’s view are in the minority. Bank of America pointed to Netflix’s almost 250 million subscribers and the fact its competitors had gone back to licensing their content to the streamer as promising signs for the company. Netflix also didn’t have to deal with the pesky task of managing a declining linear television business, as many of its legacy competitors did. The press has touted Netflix the undisputed winner, with a flurry of articles announcing its victory in the heated contest for audiences’ screen time.  

However, as Netflix consolidates its position in streaming, it may look to break into another market of the entertainment industry: video games. If that happens things could get confusing for investors. With a video game studio investors would have to contend with new questions about Netflix’s performance. Suddenly they’d have to consider things like how many copies of a new game Netflix sold or whether in-app purchases on mobile games were bringing in enough money, Bazinet says. All things that confuse the narrative for a streaming company. In other words, they would fail Bazinet’s grandma test.

For Bazinet, it’s the cost of the very things Netflix will need in order to compete in the tough streaming market that other analysts may be undervaluing. To keep fending off its competitors, Netflix will need to spend billions on content, as all media companies do. In 2023, Netflix spent $13 billion, a relatively lower number than expected because it was forced to halt production for several months during the dual writers’ and actors’ strike. 

Over the next two years, Citi expects Netflix to have higher than forecasted spending on content. For this year, Netflix said it expects to spend about $17 billion, which analysts have already factored into their estimates. But Bazinet sees forecasts for next year undervalued by about $2 billion—he thinks spending will be closer to $20 billion. Meanwhile, Disney announced it would reduce its content spend for fiscal 2024 by $2 billion to $25 billion. Bazinet is quick to caution that comparisons between legacy media and streaming companies aren’t apples to apples. 

Just spending more on content doesn’t necessarily translate to more Netflix subscribers, Bazinet says. “The jury is still out on what is the appropriate quantum of content spend to sustain a direct-to-consumer global, pay-TV substitute app,” he says. “I don’t think anyone really knows the answer to that question. We certainly know it’s more than in the linear world.”

A big M&A deal could help the company, but hurt the stock

Netflix has never done a major acquisition, even though it has roughly $7.4 billion in cash as of the third quarter of 2023, but a video game studio with significant intellectual property assets and a well-rounded mobile game studio could be a prime candidate for its first, according to Bazinet. 

Netflix already dabbles in gaming, with mobile games, some based on its existing intellectual property, such as Stranger Things. Netflix’s current slate of mobile games is growing, with downloads up a reported 180% year over year. In August, Netflix conducted the first tests for cloud streamed games in the U.K. and Canada that are available directly on its app and can be streamed on a computer or television. 

Even though Netflix has made a few small acquisitions, including smaller gaming companies like Boss Fight Entertainment and Night School Studio, it’s never done a big-time M&A deal. It would also mean the company would need to shell out a huge amount of the cash it currently has in its coffers, but that would mean its free cash flow would suffer. 

While hardly a certainty, it would be an understandable decision given Netflix’s early forays into gaming and interest in acquiring more intellectual property to turn into movies and television. On an earnings call in July, Netflix co-CEO Ted Sarandos indicated Netflix would be open to buying intellectual property, even if the bias to create its own remains. “Going out and finding IP that’s unmined is not easy,” Bazinet says. 

Netflix already has an agreement with gaming studio Ubisoft to turn its popular Assassin’s Creed franchise into a live-action series and develop at least three mobile games. 

For Bazinet, the most natural partners for a possible video game acquisition are Take-Two, which owns popular titles like Grand Theft Auto and the NBA game NBA 2K, and EA, best known for its soccer video game EA Sports FC. Take-Two, in particular, would be appealing in Bazinet’s eyes because its much anticipated Grand Theft Auto, which he called an “iconic piece of video game IP” would lend itself well to a film adaptation. “Maybe it’s a bad analogy, but it’s almost like Barbie,” he says. “You have the potential to take something and broaden its appeal, so it becomes more of a cultural phenomena.”