I think the decline in Real Madrid's performance this season is due to the lack of activity in the transfer market. Currently El Real looks to be running out of energy, in La Liga it is starting to be seen that they are increasingly difficult to compete with Barcelona.
My prediction is that Real Madrid will only reach the semifinals this season. Ancelotti's current squad is not as strong as last season. Older players like Benzema, Modric and Kroos can no longer be completely relied on.
You think Real Madrid can pass Chelsea but will be eliminated in the next round. That's general opinion.
I don't think the problem is transfers. They have a strong enough squad. They're just not the best for now. There are better teams than them. Some things you can't buy with money.
Honestly, I think that Real has some other problems, which are of a systemic nature and have existed for several years.
Real neither under Zidane nor under Ancelotti have developed a system of play and rely too much on the individual class of their players and sometimes luck, which can help in one or a few important games like last year but cannot be an effective approach every season.
Last year in the Spanish league, both Barcelona and Atletico were in a big crisis and Real won the title of the Spanish champion relatively easily, and in the Champions League they were lucky in the key matches of the knockout phase and won the Champions League.
However, this season Barcelona is playing great and Real has no chance against them in the Spanish league, and in the Champions League they also played against the ever weaker Liverpool. However, now comes the real challenges for them, Chelsea and then Manchester City. It will be very difficult for Real to repeat last year's success in the Champions League.