Cramer: Damage to IBM, Netflix hard to reverse

Netflix and IBM stock were both annihilated on Tuesday, leaving Jim Cramer wondering what to do with these stocks.

"I think there has been enough damage to both stocks that it will be hard to reverse in a day," the "Mad Money" host said.

In order to understand how to proceed with Netflix and IBM, Cramer first outlined why the stocks were put through the meat grinder.

IBM had rallied non-stop prior to reporting on Monday, but sank almost 6 percent on Tuesday. And while the numbers looked great on the surface, in reality, Cramer said the company is not doing so well.

Pedestrians walk past the IBM building in New York.
Scott Mlyn | CNBC
Pedestrians walk past the IBM building in New York.
"That is a stunning disappointment and the hot money has to come out of it." -Jim Cramer

In fact, he added that IBM is trading slow growth business lines with not-so-hot gross margins for faster growing potential revenues and profits that have not yet been harvested. The faster growing initiatives are doing well, and now comprise 37 percent of the company's business — but Cramer found a catch.

"The difficult thing for the potential buyers of the stock to get their arms around, though, is whether that 37 percent has come from a shrinking pie, making the good businesses look like they are growing faster than they really are," Cramer said.

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Ultimately, Cramer interpreted this to mean that IBM simply cannot turn itself around overnight.

"It will happen. I think that it will be in fits and starts. This is a fit. A start should be coming," he added.

Netflix was much harder to assess for Cramer. The company beat expectations, but offered confusing guidance that amounted to a huge potential shortfall. The Street was looking for 3.5 million new international subscribers, but Netflix set the bar at 2 million.

"That is a stunning disappointment and the hot money has to come out of it. At that slower growth rate … the HBO-owning Time Warner should be bought and Netflix should be sold," Cramer said.

The problem with selling Netflix so fast is that it has a strong product and is a worldwide entertainment company that is working to build out its business. Cramer worried that Netflix has overspent on content, and it hasn't paid off in higher subscriber prices or subs.

At this point, Cramer considered Netflix to have questionable credibility. It is now guilty until proven innocent. He recommended waiting for the stock to settle, and thinks next quarter could be a positive one.

As for IBM, in the long term Cramer thinks it could have a good future. Right now it is a battle for the soul of the stock.

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