Jim Cramer wants to know what the right price for Netflix was on Wednesday. Was it when the stock was up $25 at one point in the morning, soaring on its seven-for-one split news, or when it tumbled back down in the wake of Carl Icahn's victory lap?
"We know that broader ownership is key in a market like this one where home gamers tend to own stocks and institutions tend to rent them. That's why I don't turn up my nose at Netflix's seven-for-one split, even as I recognize that a stock split creates no value," the "Mad Money" host said.
In fact, Cramer does not consider a split in Netflix as being a good reason to buy the stock. It is important to remember that a split is only cosmetic.
Think about it—if you take a pencil and break it in half, you will have two pencils, but you don't have more pencil!
The problem with Netflix really comes down to who owns it, which could be the root of why it split. Right now, the stock trades heavily with institutions and hedge funds, who tend to only rent the stock. Management likely wants more retail investors, who will own the stock over the long term.
Hedge funds are either piling into the stock and riding it while it is high, or they are blasting it out and shorting it. This causes insane volatility for the stock, as was evidenced with Netflix getting crushed after Icahn's call to sell on Wednesday.
Cramer thinks that Netflix is volatile partially because it is a tough stock to value. It doesn't trade on traditional methods of measuring value, such as earnings. Instead, it trades based on sign-ups, new content and emotions.
"Here's the thing: Netflix is a company with a product that is enjoyed by the masses and this seven-for-one split allows users to buy more shares, which can entice them into the stock," Cramer explained.
Thus, the split in Netflix will make it possible for an ordinary person to buy more shares, which leads to a satisfied shareholder.
However, Cramer does think that the long-term prospects for Netflix are positive. He has seen positive reactions to stocks such as Salesforce and Visa when they both more retail oriented. He also saw that once a stock gets to the $200 range, the volatility escalates, again.
"At the end of the day, if you want to own Netflix, you should buy it because the opportunity is so great, not because you can buy more shares with fewer dollars," Cramer said.
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Likewise, he also recommended that if you want to sell Netflix, it should be because you think it's too risky at the current price. Not because some fancy hedge fund manager sells it.
Ultimately, with more retail investors owning the stock, Cramer sees a future of Netflix trading more like a normal stock instead of a toy for super-rich money managers to play with.
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