Generally, I think this is true.

However, two fairly distinct examples come to mind where I would argue it does work well.

1. The Spongebob episode(s) centering around Mrs. Puff having various nightmares/hallucinations around Spongebob ruining her life.

2. The movie Shutter Island.

Basically, its possible to do well if you write and block/frame scenes well enough that what you end up with is a story that seems to be plausible in-universe … until continuity cracks begin to show, some of which will not even be noticed by most of the audience at first, but eventually these faults become more numerous, more glaring, and eventually the main character becomes, to some degree, aware of these discontinuities and then reacts to them, and is either heavily implied or outright shown to be struggling with their grasp on reality / trauma thereafter.

I think a key element is the contrast, at the end of the story or story arc, between an actual real reality, and a character realistically affected by their hallucinations/nightmares, continuing on in a real world while trying to reconcile it with their experiences that they now know are not real.

Whereas, usually in the more bullshit versions of ‘it was all a dream’, the entire reality of the show either resets afterward, to some point in the past of the show’s timeline, or the entire storyline is shown to just be completely fantasy, thus the entirety of everything up to that point is meaningless, and then it just ends.

I have not seen Mr. Robot, but an example I have seen of doing this poorly comes from Archer.

Its been a while, but as far as I can remember, the last few seasons took place entirely inside Archer’s coma induced mind, and this is basically because the writers wrote themselves into a corner.

There are many more examples of a show where some other kind of ‘writing yourself into a corner’ situation happens, and the show runners need to somehow keep the show going for more episodes or another season, and yep, the ‘it was all a dream’ type bullshit is basically just done to retcon and what i guess we would now call ‘soft reboot’ the show, within itself.

But! There are instances where this is actually handled very well. So I would not agree with a blanket statement that this is always a bad mechanic to have in a plot, it is just that it takes significantly better writing to pull it off well.