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Valuing Netflix in a Post-Blockbuster World

Netflix may not have hammered the final nail in Blockbuster’s coffin, with reports saying the company’s headed toward bankruptcy, but it certainly helped to build the casket.

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Now this movies-by-mail business, which is also delivering its vast library through online streaming, may very well represent the in-home viewing experience of the future. And for that reason, along with Blockbuster out of the way, Cramer thinks Netflix’s $8.2 billion market cap just doesn’t measure up to the company’s true value.

You may disagree. The stock has run to $157 from almost $90, and it’s presently trading at almost twice the 25% long-term growth rate. The multiple-at-twice-the-growth-rate principle is followed by money managers everywhere, so by all traditional definitions Netflix looks expensive.

But it’s not because of that aforementioned future. The market cap “may just be too low,” Cramer said, given the inherent opportunities here. In fact, he thinks Netflix is worth “a heck of a lot more” than $8.2 billion given “the colossal opportunity to be the one-stop shop for everything cinematic.”

Sure, there are flaws with this reasoning. Where do you stop the valuation? $10 billion? $15 billion? But that doesn’t mean the reasoning can’t be used. Cramer used just this thesis when he recommended Salesforce.com , even though it traded at 65 times earnings with a 30% growth rate.

He knew that cloud computing was too promising a business to be locked into a meager $7.7 billion market cap. Sure enough, CRM now is worth $15 billion and counting, and Cramer thinks the company could one day be as big as Microsoft at its peak: $300 billion. Oh, and also worth noting: The stock is up 110% since his Oct. 5, 2009, recommendation.

The reasoning worked for CRM, and Cramer is betting it’ll work for Netflix, too. Why? Because both companies delivered disruptive technologies that changed the business landscape, and the private and public markets have turned to their products en masse. Now it’s just a question of how high their market caps can go.

Two more disruptor companies that are undervalued, as far as Cramer sees it, are Akamai Technologies and Amazon.com . Akamai is “the dominant company in the most important growth area on earth,” he said, delivering video over the Web. Given that, he said, the market cap should be double its present $9 billion size.

And bookseller turned online department store Amazon’s $68 billion market cap is almost twice that of Target, but the stock isn’t even trading at two times its growth rate. Instead, it has earned itself, for some strange reason, just a 43 multiple on 26% growth. Attach a more worthy 50 multiple on the stock, and you get a more a better sense of what AMZN is worth.

“Hey, I’m raising my price target right here right now,” Cramer said. “Amazon, $177, that’s where it’s going.”

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