Mad Money

Cramer: The potent bull case for Netflix

Cramer: The potent bull case for Netflix
Cramer: The potent bull case for Netflix

Netflix was the clear winner of FANG last year — Jim Cramer's acronym for Facebook, Amazon, Netflix and Google, the parent of Alphabet — up more than 100 percent in 2015. Unfortunately, that all changed in 2016, with the stock down 12 percent for the year.

"After months of underperformance, Netflix has been bouncing back over the last week, and I think it's got more room to run," the "Mad Money" host said.

Historically, Netflix tends to pull back hard after a prolonged run. It occurred twice before, in 2011 and in 2014. Wall Street soured on Netflix again this year as many investors thought the company didn't seem to care about profitability, and its earnings power seemed unclear in the near-term.

Yet, when the stock initially soared into the stratosphere last year, investors weren't worried about earnings weakness. They also didn't care that Netflix was spending large amounts of money on programming licenses and developing its own content.

"That is because the company was generating phenomenal subscriber growth, and subscribers are the key metric here," Cramer said.

Reed Hastings
Stephane De Sakutin | AFP | Getty Images

The spending seems justified when Netflix is adding users. After posting subscriber growth in the low 30 percent range in 2014, it generated about 30 percent in 2015. However, in 2016 its domestic subscriber growth was 14.4 percent, the first time it had been lower than 15 percent. Suddenly, it seemed that Netflix had hit a wall and growth was slowing.

In the past week, the stock has finally come roaring back with what Cramer called a "potent bull case."

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The first reason is that Netflix still has enormous potential to expand overseas. Additionally, now that it has 81.5 million subscribers, Cramer believes it can make a fortune even if it raised the price a little bit.

Third, the grace period for old users who were grandfathered in at the $7.99 rate is about to expire. That will translate into an additional $900 million a year in revenue for the domestic side of the business.

Fourth, Netflix's investments in content are generating strong programming. The last reason why Cramer is riding with the bulls on Netflix is that it signed an exclusive deal with Disney, which will kick in this fall. Netflix will be the only streaming platform to offer movies from Disney, Marvel, LucasFilm and Pixar.

"This is huge, and while Netflix may be paying Disney $300 million a year for these rights, I think they will be worth every penny," Cramer said.

So, while Netflix is selling for 50 times its 2018 earnings estimates, Cramer still thinks the stock is worth buying. It might seem expensive, but that is the cheapest the stock has been in five years.

Looks like this is just another episode of the stock falling out of favor and roaring back to new highs.

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