Priced to Sell?
Netflix, much like some of its FANG partners, has an extremely high valuation that is bolstered by a hulking price-to-earnings ratio. Netflix's P/E ratio currently stands at around 157x earnings after its earnings release sent the shares shooting up 13% in after-hours trading Tuesday. By contrast, a company like Disney is valued at just a 14.7x multiple.
Earlier this year, Netflix's valuation led its market cap to exceed that of Disney, one of America's most storied entertainment companies, raising some red flags for investors.
"Netflix was a favorite of mine for a very, very long time, but after it got bigger than Disney I switched my focus to say buy Disney," he said. "Disney is still the way to play it."
Cramer has been bullish on Disney since its August earnings release, noting his belief that CEO Bob Iger has done what is necessary to turn the company around and set the stage for its "Disneyflix" release.
Disney may also be helped by its cash situation, as Iger oversees a much more sustainable cash flow situation than Netflix CEO Reed Hastings does.
Netflix has been known to be a serial cash burner in recent years as it seeks to ramp up its international expansion and independent programming. It burned $845 million in cash in the first half of 2018, according to a Wedbush report, which has helped push the company into the high-yield debt market.
As we have seen in retail, debt is something that can crush even some of the most storied companies in America.
To be sure, some analysts have proposed that the free cash flow burn should subside before the company confronts it major debt maturities in about 10 years.
"We estimate 2018 will be the peak free cash flow burn year, although it could be 2019, before improving in 2020 and beyond," Deutsche Bank AG analyst Bryan Kraft wrote in his preview note. "We're forecasting free cash flow to turn positive in 2021."
Still, the breathing room might not be long lived given the company's looming multi-billion-dollar debt coming due in a decade, which should only be exacerbated by the company's continued forays into the junk bond market that analysts have said will balloon the debt bubble.
If the streaming market undergoes a secular shift to the scale that streaming brought on, Disney will likely be better positioned to adapt purely because of its flexibility.
Netflix definitely dominates the streaming video market share and market confidence in its subscriber growth is sending shares soaring after Tuesday's market close.
However, a more attractive valuation for Disney, a better cash flow position, and an increasing push into Netflix's own market could make the Bob Iger-led company a much more attractive trade for those looking to play entertainment stocks.