Cramer: Betting against Netflix because of its content is a huge mistake

  • "Mad Money" host Jim Cramer bucks the Netflix naysayers who think the streaming giant's spending on content is a reason to sell.
  • Cramer also reveals the magic ingredient sending Netflix's stock to new highs.

After a tech-filled week at CNBC's 1Market in San Francisco, Jim Cramer started thinking about one of his favorite high-growth names in the space: the stock of Netflix.

Up 66 percent year to date, Netflix's stock is the best performer in the S&P 500. Better yet, shares of the streaming giant have climbed over 1,000 percent in the last five years.

"But after spending a week in Silicon Valley, I realized something kind of crazy. Right now, the thing the experts love most about Netflix is its massive library of original content. Yet, not that long ago, this was the single most hated part of the story," the "Mad Money" host said.

For years after Netflix's initial public offering in 2002, analysts criticized the company for spending cash to beef up its content.

The naysayers were so forceful that investors who listened might have assumed that Netflix was effectively burning money, accelerating its inevitable downfall, Cramer said.

Now, the market has almost universally accepted Netflix's content library as its greatest strength — a far cry from what Cramer heard the experts say for years.

"These days, we all accept that when Netflix spends $7.5 to $8 billion on non-sports content this year — more than Viacom or CBS — it's a good investment, good because this programming is what fuels the company's explosive subscriber growth," Cramer said. "And new subscribers are the magic ingredient that sends this stock to new highs."

But since 2013, when Netflix's stock was just beginning its long-term rally, Cramer has watched analysts from Jeffries , Wedbush and other firms label Netflix's growth strategy as untenable, concerning and a "ticking clock."

Even as the company blew past subscriber growth estimates and demonstrated its ability to raise prices for its service, the experts still worried about Netflix's negative cash flow — even though CEO Reed Hastings said it would drive the company's success.

"What these skeptics have been missing all along is that Netflix is trying to take over the world. It's one of the few services out there that are genuinely must-have ... and the homegrown content is the reason why," Cramer said. "That's how these guys can gradually raise prices without upsetting their customers."

The "Mad Money" host argued that Netflix's model — spending aggressively on content that drives people to subscribe — has been proven to work; its spending on foreign-language content has led to increasing international subscriptions.

Even so, Cramer noticed that analysts have once again started to downgrade Netflix over valuation concerns and the seemingly never-ending fears about its content spending.

"My view? Betting against Netflix has been a huge mistake all along," Cramer said. "But given how much this stock has run, if you don't already own it, I suggest waiting for a pullback before you do any buying simply because I hate to chase."

"Of all the things that can derail a spectacular growth story like Netflix, excessive spending is pretty low on the list, despite all the hand-wringing about it," he concluded. "As it turns out, the bogeyman the bears used to frighten you for years out of the stock — all the money Netflix was throwing at original programming — is now a reason to own the stock. And it doesn't get any clearer than that."

WATCH: Cramer can't chill when he talks Netflix

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