Why Netflix, Even Up Here, Is Still a Buy

Business journalists probably overuse the word “meteoric” when it comes to describing a stock’s sizable jump in value, so it may seem cliché to stamp Netflix with the label. But once you realize that the share price has soared about $70 in just three months, it’s impossible to view the company’s performance in any other way.

The stock dropped to as low as $95 in late July when investors misread Netflix’s second-quarter earnings report. They hadn’t yet realized that the company’s most important metric was subscriber growth and not average revenue per customer, which in the age of DVD rentals mattered more. But this now is the age of streaming, where Netflix is king, and people are adopting the technology en masse. Investors have since caught on, and that’s why NFLX closed Monday at $167. Well, that and a stellar third quarter reported Oct. 20 that vaulted the stock up $19 in a single day.

The laggards of this story have been the analysts themselves. Bank of America, Wedbush, UBS and Susquehanna all have panned the stock in their own way despite Netflix’s steady move higher. The most egregious? BofA, who initiated coverage way back in February 2009 with a “sell”—when NFLX traded at $35.58.

These guys just don’t get the business. Instead of recognizing streaming as the future, if not the present, of video, they see only a DVD-by-mail company. They completely overlook the fact that Netflix now delivers its vast library of movies through the Nintendo Wii, Sony Playstation 3, Microsoft Xbox and Apple TV and iPad. Even management, in the first sentence of the press release for its most recent quarter, labeled itself “primarily a streaming company that also offers DVD-by-mail.”

“The negative analysts worry about the costs of streaming, they worry about potential competition, they think the total addressable market here is limited. Wrong!” Cramer declared. “This is a tectonic shift in the way we watch TV and movies. It is a rebellion against the high prices of cable and the need to watch on their schedule, one that bypasses entirely the need to go anywhere and pick up a DVD.”

Hence Netflix’s subscriber base growing to 16.9 million in the latest quarter, up 52 percentfrom the year before and 13 percent sequentially. And that as the costs of acquiring new subscribers declined.

So don’t fear this stock’s outsized-looking price-to-earnings multiple: 44 times next year’s earnings. Not with a 30-percent long-term growth rate. As a hedge-fund manager, Cramer would have been willing to pay up to 60 times earnings for NFLX.

“And that’s not even accounting for the fact,” he said, “that the estimates are probably way, way, way too low” given the strength of Netflix’s business.

When this story published, Cramer’s charitable trust owned Apple.

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