An in-depth analysis as well as a full-scale valuation of Netflix Corporation for Harvard University Ext-MGMT E-2620.

1. Analysis & Valuation
For MGMT E-2620, Prof. Dalko
TEAM - 10
Brian Schoenherr, Anirudh Udayashankar, Junyao Zhao, Alegra N Horne & Larry Montello

2. Netflix Company Profile
• Pioneer and leader of the on-line TV market.
• 75M subscribers in over 190 countries.
• 125 million hours of viewing per day.
• Affordable no-commitment monthly fee.
• Personalized recommendations based on
sophisticated user monitoring.
• DVD rental is very profitable but an ever smaller
contributor to their business.

3. First Mover Advantage
Very Competitive Landscape
(Source: “Premium Prospects for OTT in the USA” study from MTM, Ooyala and Vindicia)

4. Threat of New Entrants
Hybrid Services
Niche offerings
MEDIUM
Threat of Substitutes
Cable Live streaming
Opting outside
Free alternatives
HIGH
Bargaining Power of Buyers
Low cost alternatives
Low switching cost
HIGH
Bargaining Power of
Suppliers
Supplier-Competitors
Strategic Alliances
HIGH
Degree of Rivalry among
Competitors
Amazon & Hulu
HBO, CBS, Fox
Apple, Google, Roku
HIGH
Industry Analysis -
Porter’s Five Forces

5. Netflix Competitive Strategy
• 48% share, more than twice as big as the next
competitor (Amazon 20% and Hulu 10%).
• Differentiation Strategy: offering superior
content to the global video streaming market.
• Sophisticated monitoring capability to
understand their customers preferences and
select winning content.

6. Largest Opportunity for the US # 1 Online
TV provider is with the rest of the world

7. Netflix Corporate Strategy Analysis
• Three reportable segments: domestic streaming,
International streaming and Domestic DVD.
• Started with DVD rentals and built its knowledge of
(and tools to measure) winning content.
• Planned growth of customer base from 75M today to
150M by 2020.
• Primary investments:
– Global Expansion: Serving 190 countries world-wide
– $5B investment is developing their own content.

8. Strategy Analysis Conclusions
• Netflix is number 1 in video streaming and are
making investments to maintain their market
leadership.
• NFLX stock is trading at a very high premium over
what might be predicted with fundamental analysis.
This is typical of a market leader in a new emerging
high tech market.
• We predict Netflix will regress to the market growth
rate of 20% and face higher content and delivery
costs as they expand internationally.

9. Netflix – Accounting Analysis
• Revenue stream: Subscription fees only
– No advertising revenue
• Asset Recognition
– Library of DVD and streaming content
– Global network
– Mostly straight line amortization - discretionary

10. Netflix – Accounting Analysis
• Liabilities recognition: Subscription fees only
– Fixed costs for content licensing v/s variable subscription
fees; gross margin liabilities
– Future contracts of $6.1 billion – currently discussed, but
unaccounted for
– Growing international business – exchange rate volatility
• -$331 million impact in 2015

11. Netflix – Accounting Analysis
• Opinion
– Detailed MD&A
– Accounting reflective of:
• Future growth potential
• Inherent customer acquisition risks
• Impact of technological changes

12. Financial Analysis – Ratio Analysis
Overall Profitability
Year Ended 2010 2011 2012 2013 2014 2015
ROE 53.3% 35.2% 2.3% 8.4% 14.4% 5.5%
ROA 15.8% 7.4% 0.4% 2.1% 3.8% 1.2%
Financial Leverage 3.38 4.77 5.33 4.06 3.80 4.59
Sales and Net Income Growth
Year 2011 2012 2013 2014 2015
Sales Growth 48.2% 12.6% 21.2% 25.8% 23.2%
Net Income Growth 46.1% -92.4% 555.8% 137.3% -54.0%

13. Financial Analysis – DuPont Model
DECOMPOSING PROFITABILITY: DUPONT ALTERNATIVE
Year Ended Dec-10, (MM USD) 2010 2011 2012 2013 2014 2015
NOPAT / Sales 7.7% 7.5% 0.8% 3.0% 5.5% 3.5%
x Sales / Net Assets 12.3 11.5 8.8 6.6 4.7 2.9
= Operating ROA 94.5% 85.5% 6.9% 19.8% 25.9% 10.3%
Spread 104.7% 89.0% 10.3% 22.7% 31.5% -117.7%
x Net Financial Leverage -39.0% -57.0% -45.0% -50.0% -37.0% 4.0%
= Financial Leverage Gain -41.2% -50.4% -4.6% -11.4% -11.5% -4.8%
ROE 53.3% 35.2% 2.3% 8.4% 14.4% 5.5%

14. Financial Analysis – Operation
EVALUATING OPERATING MANAGEMENT
Year Ended Dec-10, (MM USD) 2010 2011 2012 2013 2014 2015
Sales / Sales 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of Sales / Sales 47.1% 37.5% 26.3% 20.0% 17.6% 15.4%
Gross Margin 52.9% 62.5% 73.7% 80.0% 82.4% 84.6%
SG&A / Sales 24.4% 24.3% 25.1% 23.5% 24.5% 27.8%
Amortization & Depreciation expense/
Sales
15.7% 26.2% 47.2% 51.2% 50.5% 52.3%
Investment Income / Sales 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%
Other Income, net of Other Expense /
Sales
0.2% -0.2% 0.0% -0.6% -0.1% -0.5%
Minority Interest / Sales 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%
EBIT Margin 13.0% 11.8% 1.4% 4.6% 7.3% 4.1%
Net Interest Expense (Income) / Sales 0.9% 0.6% 0.6% 0.7% 0.9% 2.0%
Pre-Tax Income Margin 12.1% 11.2% 0.8% 3.9% 6.4% 2.1%
Taxes / Sales 4.9% 4.2% 0.4% 1.3% 1.5% 0.3%
Net Income Margin 7.2% 7.1% 0.5% 2.6% 4.9% 1.8%

15. Financial Analysis – Investment
EVALUATING INVESTMENT MANAGEMENT
Year Ended Dec-10, (MM USD) 2010 2011 2012 2013 2014 2015
Working Capital Management:
Operating Working Capital / Sales -4.4% -5.9% -5.0% -6.7% -6.0% -6.0%
Operating Working Capital Turnover -22.6 -16.9 -20.0 -14.8 -16.7 -16.6
Accounts Payable Turnover 4.6 1.3 0.7 0.5 0.4 0.3
Days' Payables 79.8 281.2 558.4 785.6 871.7 1063.3
Long-Term Asset Management:
Net Long-Term Assets Turnover 8.0 6.8 6.1 4.6 3.7 2.5
Net Long-Term Assets / Sales 12.6% 14.6% 16.4% 21.9% 27.4% 40.1%
RP&E Turnover 7.0 2.7 2.2 2.0 1.9 1.5
Depreciation & Amortization / Sales 15.7% 26.2% 47.2% 51.2% 50.5% 52.3%

16. Financial Analysis – Financial
EVALUATING FINANCIAL MANAGEMENT
Year Ended Dec-10, (MM USD) 2010 2011 2012 2013 2014 2015
Short-Term Liquidity:
Current Ratio 1.7 1.5 1.3 1.4 1.5 1.5
Debt and Long-Term Solvency:
Liabilities-to-Equity 2.4 3.8 4.3 3.1 2.8 3.6
Debt-to-Equity 0.8 0.7 0.6 0.4 0.5 1.1
Interest Coverage Ratio:
Interest Coverage 14.6 19.0 2.5 6.9 8.0 2.1

17. Other Ratios
Year Ended Dec-10, (MM USD) 2010 2011 2012 2013 2014 2015
EBITDA Margin 28.7% 38.0% 48.6% 55.8% 57.8% 56.4%
Sustainable Growth Rate 53.3% 35.2% 2.3% 8.4% 14.4% 5.5%
Dividend policy: Netflix has not declared or paid any cash dividends, and has no
intention of paying cash dividends in the foreseeable future.
On July 14, 2015, Netflix exercised a 7:1 stock split in the form of a stock dividend
to all shareholders.
Financial Analysis – Other Ratios

18. (3,000)
(2,000)
(1,000)
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
FY 2010 FY 2011 FY 2012 FY 2013 FY 2014 FY 2015
Thousands
Revenue Operating Income Net income Free Cash Flow Net cash (used in) provided by operating activities
Cash Flow Analysis

19. Statement of Cash Flows
Year Ended Dec-10, (MM USD) 2010 2011 2012 2013 2014 2015
Net Income 160.85 226.13 17.15 112.40 266.80 122.64
After-tax net interest expense (income) 11.61 12.60 11.24 19.15 38.35 114.72
Non-operating losses (gains) -10.50 0.00 0.00 0.00 0.00 0.00
Long-term operating accruals -101.32 -1,487.96 -782.48 -808.22 -980.54 -2,207.38
Depreciation and amortization 340.07 839.62 1,702.08 2,241.68 2,781.80 3,547.05
Content expenses -441.39 -2,327.58 -2,484.56 -3,049.90 -3,762.34 -5,754.43
Operating cash flow before working capital investments $60.64 -$1,249.23 -$754.09 -$676.67 -$675.39 -$1,970.02
Net (investments in) or liquidation of operating working capital 227.37 1,579.55 788.09 793.65 730.22 1,335.30
Operating cash flow before investment in long-term assets $288.01 $330.32 $34.00 $116.98 $54.83 -$634.72
Net (investment in) or liquidation of operating long-term assets -116.09 -265.82 -245.91 -255.97 -42.87 -179.19
Free cash flow available to debt and equity $171.92 $64.50 -$211.91 -$138.99 $11.96 -$813.91
After-tax net interest expense (income) 11.61 12.60 11.24 19.15 38.35 114.72
Net debt (repayment) or issuance -1.78 195.98 -2.62 270.05 398.91 1,499.45
Free cash flow available to equity $158.53 $247.88 -$225.77 $111.91 $372.52 $570.82
Dividend (payments) 0.00 0.00 0.00 0.00 0.00 0.00
Net stock (repurchase), issuance, or other equity changes 49.78 219.56 3.66 124.56 67.62 95.61
Net increase (decrease) in cash balance $208.31 $467.44 -$222.11 $236.47 $440.14 $666.43

20. Baseline forecast –
Assumptions for current stock price $95.50
• Maintain sales growth > 25% per annum
• NOPAT Margin > 7.4% per annum
• Increase from 5.5 million subscribers (2015) to 15 million new
subscribers each year for 5 years.
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 Assumptions suggests Netflix can maintain its competitive
advantage in a very competitive industry.
 We think the current set of assumptions are unrealistic..
Netflix – Prospective Analysis

21. Netflix – Scenario Analysis
Best case scenario $95
Most likely scenario $ 65
Worst case scenario $30

22. Valuation using Price Multiples
Time Warner Cable
Price/Earnings: 28.7
Price/Book ratio: 5.85
Comcast
Price/Earnings: 17.4
Price/Book ratio: 2.64
Netflix, Inc.
Price /Earnings ratio: 398
Price /Book ratio: 18.3

23. Overall Recommendation
We assign a Sell rating to Netflix stock.
Netflix current stock price: $95 a share
Macro factors: Increased competition
Company factors: low margins, increasing
debt, negative cash flows
Fair value at $65 a share

24. The end…. Thank you.