- CNBC's Jim Cramer posits four theories for why shares of Netflix were able to pare their losses after the company issued a weaker-than-expected earnings report.
- The "Mad Money" host argues that investors tend to give Netflix CEO Reed Hastings the benefit of the doubt.
When the stock of Netflix rebounded on Tuesday, driving the Nasdaq to a 52-week high, CNBC's Jim Cramer knew he had to explain Netflix's rally, especially after the company failed to appease investors with its second-quarter earnings report.
"Of course the stock was laid to waste," the "Mad Money" host said. "The mystery here is not why Netflix got shoved into the woodchipper like Steve Buscemi in Fargo; it’s how the heck was the stock able to claw back most of its declines in an almost Lazarus-like resurrection?"
Here are some of his theories.
First, even with growing competition from services like HBO Go and Hulu, Netflix still has a strong business with "fantastic growth," Cramer said, noting that Netflix's second-quarter subscriber count still grew by 5.15 million members.
Second, its latest earnings report put to rest concerns that binge-watching was dying, as Netflix's roster of offerings continued to gain traction.
Third, the "Mad Money" host suspected investors were giving Reed Hastings, Netflix's venerable co-founder, chairman and CEO, the benefit of the doubt.
"Investors don’t seem frightened about how much money Netflix is spending on new programming, and it's spending boatloads. They trust Hastings when he says he doesn’t mind all of these competing [paid services] popping up," Cramer said. "They’re not worried that the company might be charging people too much after its recent price increase."
Fourth, but perhaps most important, Cramer argued that the benefit of the doubt extended to Hastings' financial predictions.
"The buyers seemed to be saying, 'Look, given the tremendous strength in subscribers anyway, the real issue here is Netflix’s lousy forecasting,'" Cramer said. "Yep, Hastings simply extrapolated wrong, betting there would be over a million more subs because business had been just smoking hot going into the quarter. Netflix just muffed its prediction."
That perspective helped shares of Netflix substantially stem their decline, creating a kind of "leap of faith" into the streaming giant's stock during Tuesday's trading session, the "Mad Money" host explained.
Shares of Netflix closed down 5.24 percent on Tuesday having recuperated their late Monday and early Tuesday losses.
"You have literally never gone wrong buying Netflix on the dips," Cramer argued. "When you’ve got an amazing track record like the CEO, Reed Hastings, at Netflix, the market can be very forgiving."