Death of the DVD?

The Walt Disney Co.’s Bob Iger seemed to be singing the ballad of the DVD during his company’s quarterly conference call this week. The CEO blamed 2008’s end-of-year crash for disappointing sales, as well as a shift in consumer behavior. Iger spoke of “secular changes” affecting the business, changes that could make DVD ownership obsolete.

Well, that’s what Cramer took from it. Think about it: Why buy when you can rent? And why deal with some clumsy disc when you can stream the movie online? Maybe it’s no coincidence then that Netflix’s stock exploded while Disney was struggling to make a sale. Instead of buying a $14 DVD, you could join Netflix for $8.99 and get unlimited movies and Internet streaming every month. That’s just the type of savings that families – all consumers, actually – are looking for during this recession.

As bullish as he is about this idea, Cramer hesitated a bit in recommending this stock. Admittedly, he’s gotten it wrong before. He called NFLX a sell on Oct. 23 during the Lightning Round, but the price has jumped 80% since then. There’s also a tug-of-war between the longs and shorts in Netflix, and it’s no doubt affecting the stock’s performance. Then there’s the price-to-earnings multiple – 20 – which some people think is too high. And analysts are concerned that consumers will rent fewer DVDs per month and that competition in the streaming space is all but inevitable.

Cramer isn’t saying Netflix’s outlook is flawless. But he does think the positives outweigh the negatives here. With a 15% long-term growth rate, plenty of momentum money managers would be willing to pay as high as 30 times earnings for this stock. And there’s growth potential in the streaming business, competition or not. Whether through a computer or Microsoft’s Xbox, more and more people are leaving physical discs behind. Netflix is poised to take advantage of that. Disney is not.

Yes, insiders have been selling their Netflix shares. But what do you expect after an 80% increase in price? That’s why Cramer recommended investors wait for a pullback.

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