On the August 11 episode of Mad Money, host Jim Cramer fielded a question from a caller who noted that Netflix, Inc. (NASDAQ:NFLX) was trading approximately 15% below their original purchase price and asked whether to hold or add to the position. Cramer responded: Okay, but I've got strict rules in this. One is that we do not care where a stock has come from; we care where it's going to.
And second, has the price-to-earnings multiple come down, or the earnings come down? Right now, the earnings are okay. The price-to-earnings multiple is at 20.
So call me a beginning position in Netflix, and for you, maybe you want to buy a little more to average down. Cramer's willingness to recommend averaging down shows a consistent thesis he has defended throughout summer market volatility. On June 9, when asked about headwinds pressuring the stock after a 13% pullback, Cramer pointed to market anxiety over Netflix's earlier pursuit of Warner Bros.
Discovery assets rather than operational decay: Okay, I want to buy Netflix. The biggest headwind is that they went and got involved with trying to buy the Warner Brothers Studio, and everyone thinks, oh, they don't know what they're doing. I think they took the optionality that they had.
They made a decision, then they decided not to do it, because they're going to do fine. I think we're going to look back and think, wow, I bought it down 13%, not bad. On June 30, as broad market sentiment turned cold toward megacap tech names, Cramer reiterated that macro selling pressure and residual deal anxiety created an artificial drag on the business: People think the business has slowed.
I disagree with that analysis, but you know what? The market has turned against the FAANGs. It's turned against the Mag Sevens.
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