Why Netflix and GameStop Got Slammed Last Week

For one, the fall in stock price could present a buying opportunity. For the other, it might be the beginning of a longer trend.

Apr 26, 2014 at 3:00PM

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Last week was an eventful one for stocks, with numerous companies reporting earnings, multiple important legal developments (here and here), and news that home sales are in freefall. But few companies caused as much stir as Netflix (NASDAQ:NFLX) and GameStop (NYSE:GME), which ended up as two of the worst performing stocks on the S&P 500 (SNPINDEX:^GSPC).

Shares of Netflix were down by 6.8% for the week. Things started out well for the video-streaming company. On Monday, it reported first-quarter earnings that beat analysts' expectations. For the three months ended March 31, Netflix posted net income of $0.86 per share versus the consensus forecast of $0.83.

Even more promising for shareholders was the company's announcement that it will soon raise prices by $1 to $2 a month for new customers starting in the second quarter. "The earnings leverage of even just a dollar is pretty substantial," an analyst at Hudson Square Research told Bloomberg News. "For what Netflix provides, it's [still] an incredible value for consumers."

But things took a turn for the worse later in the week. On Wednesday, the Federal Communications Commission said it will propose new rules allowing Internet service providers to charge companies like Netflix more for faster streaming speeds. On the same day, Amazon.com announced that it formed an alliance with HBO, allowing the former to stream a selection of the latter's content as part of its Amazon Prime subscription service.

Meanwhile, shares of GameStop didn't fare much better, finishing the week off by 5%. On Tuesday, the video game retailer held its annual investors day. As my colleague Andrew Marder covered, the company revealed its plans to close around GameStop 120 locations while doubling down on its other concepts -- namely, Spring Mobile, Cricket, and Simply Mac.

Although the GameStop's executives tried to cast the move in a positive light, there's simply no getting around the reality of the situation. Like other bricks and mortar retailers, it has found competition with the likes of Amazon and Wal-Mart to be increasingly unprofitable. Just recently, for instance, Wal-Mart even decided to enter the used video-game market, one that was previously dominated by GameStop.

Just to be clear, I'm not advocating that investors take any specific action based upon last week's performance of either Netflix or GameStop. At The Motley Fool, we're long-term investors, choosing to ignore the inevitable short-term noise in the market. But while everything may work out for the best for Netflix, the ominous nature of the news out of GameStop certainly shouldn't be ignored.

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John Maxfield has no position in any stocks mentioned. The Motley Fool recommends Amazon.com and Netflix and owns shares of Amazon.com, GameStop, and Netflix. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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