Mad Money

Cramer: Alphabet will skyrocket, thanks to Amazon

Cramer: Alphabet reminiscent of Amazon

Jim Cramer didn't think it was totally insane that Google rallied 4 percent on Tuesday following its announcement that it will create a new holding company called Alphabet.

"In fact, I think the stock deserved to run a lot more," the "Mad Money" host said.

However, considering the beating that the averages took on Tuesday, Cramer was impressed that it was able to withstand the massive amounts of selling and enjoy the move.

Cramer has heard many investors compare the newly formed Alphabet to Warren Buffett's structure of Berkshire Hathaway. This is because Buffett has various disparate businesses under one roof, and he lets them do what they want in order to generate the best returns.

For instance, on Monday, Buffett spent $37 billion to purchase aircraft parts maker Precision Castparts. Yet, aircraft parts have little to do with some of Buffett's larger business units, such as reinsurance, pipelines or rails.

"But I think a far more apt analogue for Alphabet is the recent transformation of Amazon," Cramer said. (Tweet This)

Pascal Rossignol | Reuters

Why? Because Amazon is known as the rapidly growing online retailer that spends almost all of its money building out new infrastructure to dominate shopping needs. At one point, Wall Street started to turn its nose up at Amazon in the belief that it would never turn a profit.

That changed this spring when Amazon decided to break out its numbers into two perspectives: as a retailer and a Web services company. As soon as investors got a sneak peak on what was behind the Web services company, they realized that it actually wasn't a spend-a-thon with no end, and they liked what they saw. It was priced at $389 back then and closed at $527 on Tuesday.

Similarly, Google has also had a reputation for reckless spending on totally unprofitable projects that have managed to outshine its lucrative and fast-paced business. At least, until its new chief financial officer Ruth Porat arrived on the scene. Porat was formerly the CFO at Morgan Stanley and had a reputation of being a stickler to control costs.

"The problem, though, is that Google has lots of forward-looking projects, truly venture-stage efforts that shouldn't be squelched by Porat, because, with a little nurturing, they could pay off gigantically someday," Cramer said.

The solution? Break them out, just like Amazon did with its Web services division.

Cramer thinks this will allow the huge and fast core business to shine within Alphabet. This way, investors can clearly understand what Google is and why it is worth so much more than anyone thought.

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In fact, Cramer suspects that investors should pay perhaps 25 percent more for Alphabet, or even more, given how profitable and fast growing its core business is.

If Alphabet were to turn off the tap on the nonprofitable portion of its business endeavors, the stock would skyrocket. Thus, Cramer says investors cannot judge this company the same negative way they did before.

So, yes, Cramer thinks it could possibly go much higher, and "thanks to today's China induced selloff in the averages you are getting a chance to buy it for a much less than you might otherwise have had to pay," Cramer added. (Tweet This)

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