It's not often that Alphabet (GOOGL -1.23%) (GOOG -1.10%) and Netflix (NFLX -9.09%) are compared in the same industries, but both companies' recent pursuits in gaming could see them directly compete soon.

No doubt, gaming can be incredibly lucrative; however, Alphabet and Netflix have both taken a flawed approach to entering this highly competitive industry -- and it could negatively impact each of their stocks. 

A rocky venture

Alphabet launched its cloud gaming service, Google Stadia, in November 2019, deciding in February 2021 to scale back the platform after less than two years because of dismal growth. Now, Netflix seems poised to follow Alphabet's path into games by similarly pursuing cloud gaming, a largely underperforming technology. 

Cloud gaming is a feature that allows consumers to stream games directly to any device, such as a laptop, computer, smartphone, or tablet. The selling point is that users don't need to shell out hundreds of dollars on a gaming console to enjoy popular titles, as they can stream them, negating the need for expensive hardware.

The reasoning sounds promising; however, the reality is that very few consumers who are interested in playing console-style games are also unwilling to purchase a game console. The result creates a small market of people actively willing to subscribe to an exclusively cloud gaming service, mainly because cloud gaming isn't as reliable as playing downloaded games on a console or PC. 

Google Stadia experienced this reality firsthand, with the vastly lower player counts it received on major games compared to consoles such as Microsoft's (MSFT -1.27%) Xbox and Sony's (SONY -0.71%) PlayStation. Just as an example, on Feb. 1, the immensely popular free-to-play game Destiny 2 garnered 5,390 players on Google Stadia, while Xbox achieved 275,000, PlayStation had 355,000, and Valve's Steam reached 224,00.

The number of players in February had actually fallen since March 2020, when Destiny 2 players on Google Stadia averaged about 5,500 per day. And Google Stadia's attempt to coax gamers in 2020, by offering a free trial of the service proved unsuccessful as Destiny 2 players didn't rise above 36,000 before immediately beginning to decline again.

As a result, Alphabet decided to scale back Google Stadia after less than two years of service, shutting down its game development studio, Stadia Games and Entertainment. The cloud gaming platform continues to offer third-party party games but no longer has plans to develop in-house exclusive titles, which are key to attracting new gamers. Alphabet is also pivoting its gaming endeavors by offering its Stadia technology directly to developers who could benefit from using Google's software rather than building their own cloud gaming service.

Netflix takes risks

Netflix Games launched in November 2021 as an addition to Netflix's video streaming service, offering a variety of mobile games free to subscribers. The company's venture into games sees it attempting to diversify its services and add value to a Netflix subscription. However, the company has had issues attracting players, with a study from Apptopia revealing at the start of August that less than 1% of subscribers are engaging with Netflix Games.

More recently, Netflix began looking to hire cloud gaming specialists through multiple job postings, stating on one of the listings that the position will "support our cloud gaming service."While Netflix Games has only released mobile titles so far, the job listings could mean the company is looking to branch out to more extensive, console-style games. 

Netflix has arguably a better chance to succeed in cloud gaming than Alphabet, considering that it would be an added feature of its streaming platform, not the whole service. Subscribers would pay for access to the company's popular film and TV library, with games as a bonus. However, the company will still be fighting an uphill battle against game giants Microsoft and Sony, each of which has its own comprehensive gaming subscription, for its investment to be worthwhile.

If Netflix can't attract more players soon, the company could sink millions into a venture that never takes off. 

Is it time to sell Alphabet and Netflix?

Despite Alphabet's and Netflix's precarious gaming ventures, each company is still a buy, considering the success of other aspects of their businesses. For instance, Alphabet's advertising business is booming, generating $56.3 billion in its second quarter -- an 11.6% year-over-year increases. Meanwhile, Netflix's stock has been on the rise since it posted better-than-expected Q2 2022 subscriber figures, as well as a projection that the platform would reach an all-time high of 221 million members in Q3 2022

Investors should continue to be bullish about each of these stocks but also cautious about their cloud gaming pursuits. Alphabet has smartly pivoted Google Stadia into safer endeavors, but Netflix is just getting started. There's a chance Netflix could sink billions of dollars into its gaming division only to attract a meager return on its investment. Its next steps in this area bear watching.