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Is this a short stumble for Netflix, or is the competition heating up too fast for them to keep up?
Many investors are left scratching their heads on Thursday, as they watched Netflix tumble after reporting a subpar quarter on Wednesday night.
Jim Cramer refers to Netflix as a "cult stock"—that is, stocks such as Amazon, Netflix and Tesla that have so captured America's heart with exciting press releases that they generally don't have to show earnings when they report. So how did this disaster for Netflix happen? The "Mad Money" host explains:
To start, Cramer thinks that expectations were just too high for this stock going into the quarter. The stock has rallied from $60 to the mid $400's, and investors just weren't able to justify the price at this level.
"Netflix has been the consummate high-flier and you really couldn't justify its sky-high price-to-earnings multiple based on the company's 33 percent growth rate," added Cramer.
Further disappointment brewed as investors thought that Netflix would add subscribers like crazy, and that did not happen. Reports show that it added approximately 600,000 fewer subscribers than were originally forecast.
Essentially, too high expectations on a high flying stock where subscribers were already aggravated over price hikes led to an anatomy of disaster for Netflix. And to add insult to injury, the competition has taken a bite out of their earnings with Amazon Prime, Hulu, HBO Go and now CBS is added to the competition.
Historically Cramer has seen that when the prices for Netflix fall, investors do better on the way down then to buy it at lower levels.
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"In my mind, the big question here is simple: was this disappointment caused by a one-time price increase, or was it the result of the competition finally heating up? If it's the former, then Netflix will be worth buying again at some point on the way down. If it's the latter, then this could be a house of pain for a very long time," Cramer said.
Cramer added that the stock needs to go lower before anyone should think about buying into weakness, and it's not too late to sell Netflix. So for now, it looks like a beloved cult stock has lost its charm.
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