What Social Media IPOs Mean for Netflix Valuation

Investors should prepare for an “amazing opportunity” Cramer said Monday, as more and more social media companies hold initial public offerings. The IPOs will change the way we view certain tech stocks and make us willing to pay more for them.

There has been a recent wave of IPO activity in the world of social media, said the “Mad Money” host. Last week, Demand Media came public, and soon after shares jumped 38 percent. On Thursday, LinkedIn filed for its own IPO, with some analysts estimating it could be worth up to $3 billion as a publicly traded company. And other private ventures, including Skype, Kayak.com, Groupon, Zynga and Facebook, are also set to IPO. And when these companies arrive on the open market, Cramer said, there will be a “valuation revolution” in new-media stocks. Their sky-high prices will affect the valuations of other top Nasdaq names.

Take Netflix , for example. The stock is up 295 percent since Cramer recommended it in October 2009 when it was trading at $54.24. Today, many people think it’s an expensive stock, even though the company reported an strong quarter last week. But social media companies right now are getting attractive valuations and are expected to trade at lofty levels after coming public. When that happens, Cramer said, Netflix will look a lot cheaper and people will be willing to pay more for it.

Facebook, for instance, likely booked roughly $2 billion of sales in 2010, a 209-percent increase from $650 million in 2009. For this reason, Cramer thinks the company clearly deserves a premium multiple for its growth rate. Assuming Facebook’s revenues double this year to $4 billion, its $50 billion market cap would mean it’s trading at 25 times last year’s sales and 12.5 times 2011 sales. Then again, that’s assuming Facebook’s overall value will remain at $50 billion after it becomes public. It could be higher.

So what does that mean for Netflix? From a conservative standpoint, Netflix would have a $22 billion market cap if it were valued at 10 times last year’s sales. At those figures, it would have a share price of $415, which is 94 percent higher than its current level.

Now, Cramer wasn't saying that NFLX would definitely reach that price, but he certainly thinks that the stock would double if it was like Facebook, private and coming public, rather than already public. In that case, there'd be no hyper-negative analysts bashing Netflix, only investors impressed with the high revenue growth and 20 million subscribers.

Still, Cramer thinks Netflix could possibly cross the $400 mark if it executed at the same level as Amazon.com. The main point here, though, is to view a Netflix—or a Google or an Apple —through the prism of these social media IPOs and not the bears’ perspective. They may not “get” Netflix and its potential yet, but they soon will.

“The coming wave of social media IPOs will change the way we look at many stocks and make us willing to pay a whole lot more for them,” He explained. “You have to learn how to look at stocks like Netflix through the lens of Facebook and the other social media names and not through the jaundiced eyes of the bears who have been wrong about this company for ages.”

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

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