This report provides a valuation of Netflix using three methods: comparable companies analysis, precedent transactions analysis, and discounted cash flow analysis. The comparable companies method yielded a valuation range of $1.62 billion to $13.97 billion. The precedent transactions method, using acquisitions of other media companies, produced a much lower range of $234.41 million to $379.52 million. However, this method was deemed not representative of Netflix's fair value. The discounted cash flow analysis valued Netflix at $11.96 billion, using projections through 2020 and a weighted average cost of capital of 12.07%.

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Executive Summary
§ This valuation report was prepared to assess the enterprise value of Netflix, Inc. Three methods were
utilized to perform the valuation, namely comparable companies, precedent transaction, and discounted
cash flow (DCF) analysis.
§ Within the next two years, Netflix plans on executing strategy that will result in business operations in
more than 200 countries.
§ The company’s gross profit margin of 117% over the past half decade is more than three times the
industry’s average. As of the end of the first quarter of 2015, Netflix controls a significant 57% market
share. Both statements offer assurance that the firm will achieve its global expansion plan. However,
low levels of entry barrier acts as a word of caution and a potential opportunity for competitors such as
Hulu and Amazon Prime to gain market share presence.
§ The comparable companies method resulted in the analysis of Netflix’s three close competitors, namely
Google, Amazon, and Best Buy. Performing the necessary adjustments on the companies’ financial
documents yielded a valuation range of $1.62 to 13.97 billion, with the average value of around $8.2
billion. The enterprise value was determined using the EV/Adjusted LTM EBITDA multiple.
§ The precedent transaction method involved analyzing the acquisition of Blockbuster, Inc. by DISH
Network Corporation and Creditor’s acquisition of Movie Gallery Inc. The selection of the precedent
transactions was dictated by the location of the target’s business, its availability of published financial
data, and it’s SIC Code. Due to the declining targets’ businesses, the precedent transaction method
yielded a low valuation range for Netflix ranging from $234.41 to $379.52 million. This method does
not represent the fair basis for determining Netflix’s enterprise value.
§
The third method of valuation, DCF analysis, utilized the projection period beginning from the 2015
estimate until 2020. The result is the Netflix’s enterprise value of $11.96 billion with the beta value of
1.33 and WACC of 12.07%. The sensitivity analysis reveals that the present value of EBITDA’s
terminal value accounts for anywhere between 91.2% to 92.9% of the final enterprise value, while only
the small portion is affected by the projected free cash flow.

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Macroeconomic
Outlook:
U.S.
The United States’ real Gross Domestic Product (GDP) has seen an increase in the third quarter of
2015. Specifically, it increased by 2.7 percent, which is less than the second quarter growth rate at 3.9
percent1
. The main reason for the real GDP increase over the past six months is due to the spending on goods
and services, particularly in healthcare1
. As of this period, the U.S. population is around 322.2 million and is
ranked the third largest country by population worldwide2,3
. Data from 2014 reveals that the yearly growth
rate is 0.79% with the population density of 34 people per square kilometer3
.
For the last twelve months ending on October 2015, the inflation rate was 0.2% with the negative
trend, which started in 2011 when the inflation rate was 3.0%4
. The Consumer Price Index (CPI) percentage
change from December 2013 to December of 2014, for the urban population, was 0.85
. In terms of
unemployment, as of November 2015, the rate was determined to be 5%, which amounted to 7.9 million of
unemployed individuals6
. However, since November of 2014, the unemployment rate has decreased by 0.8%
or equivalent to a decrease of 1.1 million unemployed people6
.
Management consulting firm, A.T. Kearney,
conducted its annual Foreign Direct Investment (FDI)
Confidence Index, which takes into consideration economical
and political situations to rank countries based on the
likelihood of receiving foreign investments7
. A.T. Kearney
has ranked U.S. number one place for their FDI Confidence
Index for the year 2014. “In 2013 alone, international firms
invested $236 billion in the U.S. economy, a 35 percent
increase from 2012”8
.
Cumulative Foreign
Direct Investments in the U.S. for the year 20138
.
Breakdown of the types of foreign investments in

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the U.S. during the period 2012-20138
.
The FDI depicts the types of investment flows in the United States for 2012
and 2013. The biggest portion of flows in 2012 was of the equity type, which
continued to be accurate for 20138
. Similarly, reinvestment of earnings flow continued
to increase through 2013. Negative trend for debt instruments in 2012 was reversed in
2013 from -$16.2 to $9.4 billion8
.
During the period 1971 to 2015, the average interest rate for United States was
5.93%, with the current rate, as of October, of 0.25%9
. Personal and disposable
personal incomes have both increased, as of October of this year, only marginally, at
0.4%, or $68.1 billion and $56.8 billion, respectively10
. “Personal consumption
expenditures (PCE) increased $15.2 billion, or 0.1 percent”10
. Similar to the PCE, the
prices of houses in the U.S. have increased. Specifically, “house prices rose 1.3
percent in the third quarter of 2015…”11
. In addition to the price increase for the
current quarter, the year over year (YOY) housing price increased by 5.7%11
.
Industry
Analysis
Netflix is an online international streaming provider of media. Subscribers can
choose to stream an array of shows or movies of their choice or simply request a DVD
in the mail. Netflix’s online inventory contains a mass collection content, which has
dominated the culture of video streaming by effortlessly providing a multitude of
continuous episodes at one’s fingertips. The media available to users range from
previous decades of classic black and white films to recent action packed thriller
releases.
In addition to viewer’s favorite shows and movies Netflix has also offers media
by their very own production teams. Popularly known as Netflix’s Originals, they have
worked with producers from renowned networks to create and allow viewers to watch an entire season of a
show instantly instead of waiting for the traditional weekly episode. Interestingly, Netflix has partnered with
Disney’s Marvel to develop historic and favored four series epic as well as a mini series. With this deal
Netflix, is unique from its competitors since they have an ability to expand to a population who favors
Marvel’s comics.
Such competitors are Amazon, Hulu, HBO go and Redbox. Netflix has expanded into 60 countries
and plans to grow their expansion to a total over 200 countries within two years. Compared to competitors
Netflix is quickly increasing their services to other nations. As of March 2014, Netflix hold 57% of market
share compared to its competitors. Hulu, which is also a popular streaming provider, only covers 10% of

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market share. It is safe to say Netflix is the world’s leading Internet streaming service provider.
In the past five years profit margin for Netflix has increased by 154% and gross profit margin has
increased by 117%. The average industry gross profit margin is 33.66% and Netflix has a similar margin of
32.36%. The larger competitors of the Netflix are Best Buy, and Amazon, which also cater to different
industries with the selection of products offered. These companies often report higher sales and profit since
they a diverse in their product line. Furthermore, Netflix’s margins are similar to competitors given the
specific industry in the overall large sector.
Regarding the rate of return on total capital, Netflix has shown infrequent percentage in the last few
years. Netflix is a streaming provider, which means they have limited inventory and fixed assets resulting in
less capital compared to competitors. Consequently, Netflix has a lower rate of return on total capital
compared to oil, gas firms and computer hardware companies.
In relation to the economic moat, Netflix has relatively low barriers to entry. Netflix’s characteristics
are easily available to replicate except for their original series. Nonetheless, through branding, user-friendly
software and low subscriber fee, Netflix has created a niche in the market.

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Company
Analysis
Company Description
Software executive, Reed Hastings, founded Netflix in 1997 and fellow software executive Marc
Randolph co-found Netflix to offer online movie rentals1
. The DVD format was introduced in the spring of
the year and less than a thousand titles were then available2
. Even though DVDs and DVD players was
expensive and owned by a few Americans, Hastings and Randolph thought that DVDs had clear potential
to replace VHS as the consumer format of choice3
. They also saw that few video stores carried DVDs,
making renting them in person a hit-or-miss affair. They wanted to take advantage and serve this segment4
.
In 1999, Netflix launched the subscription service, offering unlimited rentals for one low monthly
subscription (Netflix). In 2002, it had an IPO and sold 5.5 million shares in late May it raised $82.5
million, more than some had expected5
. Netflix is currently being sold in the NASDAQ under the ticker
1
Netflix.
Netflix.
Prnetflixcom.
2015.
Available
at:
https://pr.netflix.com/WebClient/loginPageSalesNetWorksAction.do?contentGroupId=10477.
Accessed
December
3,
2015.
2
Funding
Universe.
History
of
Netflix,
Inc.
–
FundingUniverse.
Fundinguniversecom.
2015.
Available
at:
2
Funding
Universe.
History
of
Netflix,
Inc.
–
FundingUniverse.
Fundinguniversecom.
2015.
Available
at:
http://www.fundinguniverse.com/company-­‐histories/netflix-­‐inc-­‐history/.
Accessed
December
9,
2015.
3
Funding
Universe.
History
of
Netflix,
Inc.
–
FundingUniverse.
Fundinguniversecom.
2015.
Available
at:
http://www.fundinguniverse.com/company-­‐histories/netflix-­‐inc-­‐history/.
Accessed
December
9,
2015.
4
Funding
Universe.
History
of
Netflix,
Inc.
–
FundingUniverse.
Fundinguniversecom.
2015.
Available
at:
http://www.fundinguniverse.com/company-­‐histories/netflix-­‐inc-­‐history/.
Accessed
December
9,
2015.
5
Funding
Universe.
History
of
Netflix,
Inc.
–
FundingUniverse.
Fundinguniversecom.
2015.
Available
at:
http://www.fundinguniverse.com/company-­‐histories/netflix-­‐inc-­‐history/.
Accessed
December
9,
2015.

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“NFLX”6
. Netflix vision is “Our core strategy is to grow our streaming membership business globally
within the parameters of our consolidated net income and operating segment contribution profit (loss)
targets. We are continuously improving our members' experience by expanding our streaming content with
a focus on a programming mix of content that delights our members. Netflix continually enhances the user
interface and streaming service to even more Internet-connected screens”.
Netflix currently has 69 million subscribers in 60 countries and this year expects to end with 74
million subscribers7
. The amount of subscribers for Netflix has been increasing steadily each quarter and as
seen in the graph below, Netflix has more than triple their subscriber in the past 3 years.
Number of Netflix streaming subscribers worldwide from 3rd quarter 2011 to 3rd quarter 2015
(in millions)
6
Netflix.
Netflix.
Prnetflixcom.
2015.
Available
at:
https://pr.netflix.com/WebClient/loginPageSalesNetWorksAction.do?contentGroupId=10477.
Accessed
December
3,
2015.
7
Letter
to
Shareholders.
Letter
To
Shareholders.
1st
ed.
Netflix;
2015.
Available
at:
http://ir.netflix.com/.
Accessed
December
12,
2015.

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Netflix allows members to enjoy more than
2 billion hours of TV shows and movies per
month, including original series,
documentaries and feature films on any
Internet connected screen, anytime,
anywhere, as much as they want8
. As you
see in the graph below, Netflix is the choice
for Americans when they want to watch TV
content online. 63% of Americans select
Netflix.
Netflix’s movies are delivered via the US Postal
Service from distribution centers located in
major US cities. Since 2007, their movies and
shows have been streamed to some 1,000
devices including PCs and TVs 9
. Netflix ships
millions of discs daily in the US and does not
charge late fees or have due date. The company
has organized its business into three operating
segments: domestic streaming, international
streaming, and domestic DVD10
. Its two
streaming segments generate nearly $3.5 billion
in revenue through monthly subscriptions this
accounts for about 80% of its net revenue.
Netflix also maintains its legacy domestic DVD business
(20%) through the segment that sells monthly subscriptions for DVDs by mail11
.
8
Hampton
S.
Company
Description.
Subscriberhooverscomproxylibrarystonybrookedu.
2015.
Available
at:
http://subscriber.hoovers.com.proxy.library.stonybrook.edu/H/company360/fulldescription.html?companyId=1007520
00000000.
Accessed
December
12,
2015.
9
Letter
to
Shareholders.
Letter
To
Shareholders.
1st
ed.
Netflix;
2015.
Available
at:
http://ir.netflix.com/.
Accessed
December
12,
2015.
10
Letter
to
Shareholders.
Letter
To
Shareholders.
1st
ed.
Netflix;
2015.
Available
at:
http://ir.netflix.com/.
Accessed
December
12,
2015.
11
Letter
to
Shareholders.
Letter
To
Shareholders.
1st
ed.
Netflix;
2015.
Available
at:
http://ir.netflix.com/.
Accessed
December
12,
2015.

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SWOT
Analysis
Strengths
Weaknesses
● Financial performance (increasing
revenue, gross profit, EBITDA)
● Increased number of subscriptions
● Market expansion (Spain, Italy, and
Portugal)
● Lawsuits hurt company status (patent
infringement)
Opportunities
Threats
● Partnerships increase the number of
viewers (e.g. ABC, CBS, Studios)
● Increased video streaming demand
● Increased subscription price ($7.99 for
standard & $9.99 for HD)
● Increased exposure to competitors
● Declined DVD-by-mail business (-
11% Y/Y in profit)
Conducting a SWOT analysis determined key factors for Neftlix’s strengths and weakness.
Regarding strengths, Netflix have strong financial performance. The revenue, gross profit and EBITDA
has been increasing steadily each year. Another strength for Netflix is that Netflix’s subscription base has
increased each quarter especially in the international market. Netflix recently expanded into Spain, Italy,
and Portugal. Netflix has many opportunities. One of their opportunities is to have partnerships with
studios and T.V networks to have their content on Netflix. This can attract more and new subscriptions to
Netflix.
Netflix also has the opportunity to capitalize on the growing demand that streaming has. Each year
more and more people are streaming videos and Netflix has the opportunities to capture these new
streamers. A weakness for Netflix is the lawsuits they have gone through over patent infringement. This
can hurt the company status and cause more scrutiny. The threats for Netflix is losing customers due rising
its price for their services. Netflix recently raised its standard subscription to $7.99 and its HD
subscription to $9.99. Another threat for Netflix is their exposure to competitors. Netflix are in fierce
competition with Amazon Prime, YouTube and other companies. Netflix can lose customers to these
services. Finally, Netflix last threat is the declining numbers of their DVD-by-mail service. Their DVD-
by-mail service consists of 20% of their business and can lose these customers if Netflix is unable to at
least get them to subscribe to the streaming service.

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Management
Analysis
Year after year Netflix’s management has met the objectives of its shareholders. Netflix has
experienced tremendous growth in Return on Equity and in the price of its stock. Last year Netflix had a
return on Equity of 14.36%. This a high Return of Equity (ROE) and a growth of 70% from the previous
year. Overall, the ROE has increased 12.36% in the past 2 years. Netflix has undergone tremendous
growth. In the past year the stock price has risen from $48.80 (End of 2014) to $118.91 (as of 12/11/15)
with a growth of 143.66%. Also the stock price has grown $105.68 per share the past 3 years. Management
not only has met the objectives of its shareholders, they have exceeded it.
2012
Year Over Year
Growth
2013
Year Over Year
Growth
2014
Return on
Equity
2.30%
266%
8.43%
70%
14.36
%
2012
Year Over
Year Growth
2013
Year Over
Year Growth
2014
Year Over
Year Growth
As of
12/11/15
Stock
Price of
Netflix
13.23
297.63%
52.60
-7.21%
48.80
143.66%
118.91
The management of Netflix doesn’t own a large stake of the company. The company only owns
1.82% of its shares12
. However the management does have a high stake in terms of ownership of stocks. As
we see below the management has millions of dollars of stock options in stake. For all the members of
Management the majority of their compensation is based on stock options. So if Netflix is doing poorly, they
receive less compensation.
12
6.
Yahoo
Finance.
NFLX
Key
Statistics
|
Netflix,
Inc.
Stock
-­‐
Yahoo!
Finance.
Financeyahoocom.
2015.
Available
at:
http://finance.yahoo.com/q/ks?s=NFLX+Key+Statistics.
Accessed
December
12,
2015.

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Source: Netflix 8K
In fact we have seen that happen. When Netflix is performing well their compensation increases but
when they are operating poorly, their compensation decreases. In the graph below illustrates this. When
Netflix’s stock has undergone growth in the past years, the management's compensation increased and when
the price decreased their compensation decreased.
Source: Morningstar

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Despite the fact that Netflix’s management only owns 1.82% of its shares, Netflix is own by a large
amount of Savvy institutional investors. 87.50% of Institutions own Netflix’s stock13
. As we see below their
top four shareholders are big institutional investors.
Source: Netflix’s Proxy Statement
13
6.
Yahoo
Finance.
NFLX
Key
Statistics
|
Netflix,
Inc.
Stock
-­‐
Yahoo!
Finance.
Financeyahoocom.
2015.
Available
at:
http://finance.yahoo.com/q/ks?s=NFLX+Key+Statistics.
Accessed
December
12,
2015.

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Historical
Balance
Sheet
and
Income
Statement
Analysis
The balance sheet reflects that current assets and current liabilities increased steadily from 2012 to
2014. Net working capital was the highest during 2013, which indicated Netflix had more cash available,
compared to 2014. In 2012 Netflix invested heavily in expanding into the markets of the UK and Ireland
that account for the low EBIT. Also, the cash available for 2012 was 290.3 million however by 2014 the
cash and cash equivalents grew by 3.8 times.

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The income statement represents the sales of 5,504 million for 2014 fiscal year. The sales in 2013
increased by 25.8% in 2014. The COGS percentage of sales decreased from 70.5% in 2013 to 68.2% in 2014.
The gross profit from has steadied hovering around 35.0-35.7% increase from 2012 to 2014.
Financial
Ratios
Current ratio gives an indication into the company's ability to pay off short-term liabilities. If a
company reports a high ratio, the company is more capable of paying obligations such as cash, inventory and
account receivables. During the fiscal year of 2012, Netflix had a current ratio of 1.34. In 2013 the current
ratio increased by 6.2% expressing a ratio of 1.42. During the fiscal year ending in 2014, the current ratio
increased by 4.2% to a ratio of 1.48. The quick ratio focuses also on the liquidity, which filters the current
ratio by measuring easily, liquidated assets to cover the current liabilities. Since Netflix does not have any
inventory, the quick ratio equals the same as the current ratio.
The total asset turnover for the fiscal year of 2014 is 0.53, which has slightly decreased from 2013 of a
ratio 0.57. This ratio measures Netflix’s ability to use its assets to generate sales per dollar value of assets.
The company is experiencing expansion into other countries, which can be an explanation to decrease in total
asset turnover. On the other hand, the debt to asset ratio from 2013 to 2014 has decreased by 2.2%. Therefore,
Netflix has less of a degree of leverage and less financial risk.

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The net profit margin, returns on assets (ROA), and return on equity (ROE) show an exponential
increase from 2012 to 2013. From 2013 to 2014 the net profit margin increased by 95%. The gross profit
slightly decreased from 0.58 in 2013 to 0.53 in 2014. Although revenue has increased, the cost has also
increased. The ROE reveals a 70.4% increase from 2013 to 2014. Similarly, ROA has increased by 82.1% in
the last fiscal year.

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Projections
The projections conducted for Netflix include Income Statement, Balance Sheet, and the Cash Flows for
the current year ending until 2020. For the Income Statement, the sales percentage growths for the years 2015,
2016, and 2017 were taken from the Bloomberg data. For the rest of the projection period, the percentage
growth was assumed to be decreasing by approximately 3% year-over-year. The percentage growths for the rest
of the items were calculated using the sales figures for 2014. The percent growth margins for the COGS, Gross
Profit, SG&A, EBITDA, D&A, and EBIT were kept constant to simplify the projection values. Similar to the
Income Statement, the Balance Sheet projections were made under the assumption of constant growth using the
same percentage margins and sales figure of 2014.
The small discrepancies between the total assets and the total liabilities and shareholders’ equity are due
to the rounding errors. Finally, the cash flow projections were calculated using the Net Income line from the
Income statement, depreciation and amortization, interest expense, and changes in net working capital values.
The tax rate is assumed to be 20%. Changes in the Net Working Capital were determined according to the 2014
NWC sales percentage margin base, which was assumed to be constant throughout the projection period. All
three projections suggest that the company is bullish given its increasing net income and cash flow values.

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Valuation
Comparable Companies Analysis
The Comparable Companies Analysis was conducted to compare Netflix to its 3 top competitors
(Alphabet Inc., Amazon and Best Buy). The purpose of the analysis was to establish a range for the valuation of
Netflix. First, each company was researched based on financials and key information from their 10Qs, 10Ks,
Letters to Shareholders, Balance Sheets, Income Statements and Proxy Statements. The information was
imported into an input sheet that categorized the ratios for our analysis. Then the output sheet (as seen below)
used the enterprise value from each comparable company from the input sheet to calculate key statistics and
ratios that are found in the output sheet. Specifically, the output sheet calculated Enterprise Value/LTM
EBITDA, Enterprise Value/ 2015E EBITDA and Enterprise Value/2016E EBITDA. We found that Amazon
had the highest Enterprise Value/ LTM EBITDA with 40.456 million and Best Buy had the lowest with 4.362
million. In the industry as a whole the mean was 22.470 million. For the estimates of 2015 and 2016, Amazon is
projected again to have the highest Enterprise Value/LTM EBITDA with 29.785 million and 23.458 million and
Best Buy is projected to have the lowest Enterprise Value/LTM EBITDA with 3.969 million and 3.799 million.
In 2015 the industry is projected to have a mean of 17.231 million and in 2016 is projected to be at 14.136
million.

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The statistics were assessed to calculate Metric, Multiple Range and Implied Enterprise Value. Through
calculations the estimated value of Netflix ranges from $1.623- $15.053 billion for current LTM. The estimates
for 2015 and 2016 were also projected. The estimate value for Netflix for 2015 is $1.919 to $14.4 billion and for
2016 is projected to be $2.263 - $13.970 billion.
Precedent
Transaction
Analysis
The Precedent Transaction Analysis begins by performing the search for the previous mergers and
acquisitions. The search was performed using the Bloomberg Terminal, Internet search, and the database given to
our group that contained deals in the Netflix's SIC code from 1984 until 2011. In addition, the search for mergers
and acquisitions of the comparable companies was also performed to determine if any of them belong to the
category of online video streaming industry. In order to perform this type of analysis, it was critical to obtain the
target’s data regarding the income statement and the deal-specific data. The intent was to be confined to the firms
within the U.S. and in the SIC code 7841 (Video Tape Rental). Excluding the potential candidates that opted for
submitting Form D which exempts companies from disclosing the financial and other information to the SEC as
well as all the private target companies for which obtaining any type of financial dataset would be infeasible for
the purposes of this project, a total of two precedent transactions were analyzed to determine the valuation range
for Netflix.
The first transaction involves the acquirer, DISH Network Corporation, and the target, Blockbuster, Inc.
The deal was announced on April 6, 2011 and became effective on April 26, 2011. The transaction type was
public/public and the purchase consideration was cash only. Specifically, DISH paid $320.6 million for 100%
ownership of Blockbuster, which filed for Chapter 11 Bankruptcy as part of its 8K on January 14, 2011. The

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overall deal dynamic was friendly. Using SEC’s filing, the Blockbuster’s Balance Sheet, Cash Flow, and Income
Statements were used to create adjusted multiples. An issue that arose with this transaction is the fact that the
potential LTM multiples, including sales, were negative. In this case, an absolute value of the adjusted LTM
EBITDA was used to calculate the EV/LTM EBITDA multiple. The reason behind negative LTM values is the
Blockbuster’s declining business. As such, it does not represent the most reliable choice for the precedent
transaction. The end result of the declining business is seen in the Blockbuster’s relatively small Enterprise Value,
which resulted in small EV/LTM EBITDA multiple.
The second precedent transaction that was considered when determining the valuation range for Netflix
was between the acquirer, Creditors, and the target, Movie Gallery, Inc. The deal was announced on December
22, 2007 and became effective on June 10, 2008. The purchase consideration for the acquisition was cash and the
transaction type was private/public. Creditors obtained 100% ownership of Movie Gallery for $161.29 million.
Similar to the case of Blockbuster, Movie Gallery also filed for Chapter 11 Bankruptcy. The result is EV/LTM
EBITDA multiple that is small and does not necessarily provide the fairest estimate of the Netflix’s value.
Combining the ranges provided by the two transactions and multiplying them by the Netflix’s LTM metric of
$372.08 million yields a valuation range of $234.41 to $379.52 million. It is clear that this type of analysis does
not represent the real value of Netflix due to the conditions under which both companies operated at the end of
their autonomy.

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Acquisition:
Netflix
Valuation
Report
18
NASDAQ
ticker:
NFLX
Discounted
Cash
Flows
(DCF)
Valuation
Beta
Calculation
Beta measures the systematic risk or volatility on expected rate of return on an investment based on the
rate of return of the market. On average the rate of return of the market can often vary from seven to eight
percent. The S&P 500 has a beta of 1.0. If a stock has a beta of 1.0 then this stock should have a rate of return
equal to the market’s rate of return. If a stock has a beta of less than 1.0, the stock has lower systematic risk
compared to the market. On the other hand, a beta greater than 1.0 indicated the company has a higher systematic
risk than the market. To determine the beta of Netflix, the beta of peer companies were compared. Given the
comparisons of the peer companies, Netflix has a beta of 1.33.
Cost
of
Equity
or
Cost
of
Capital
Calculation
The weighted average cost of capital (WACC) was calculated to determine the discount rate, which is
used for the present value of Netflix’s projected cash flow. WACC is also considered an opportunity cost of
capital. This method is another way to determine what one would expect to earn in an alternative investment
profile with similar risk. The capital structure of Netflix mainly composed of equity. As of 2014, the market value
of the firm’s equity is 53,080 million and the market value of debt is 900 million. The weight of equity was
derived by dividing the total market value by each the equity and debt. The weight of equity is 98.33% and the
weight of debt is 1.67%. The tax rate used was 24% and the WACC was calculated to be 12.07%.
Netflix’s future cash flow growth was estimated by determining the company's 12 months free cash flow,
which is equal to the operating cash flow minus capital expenditures. This information was found from the
company's 10 Q. The last 5 years were used to find the FCF rate of growth. Then the free cash flow was
multiplied by the growth rates to find the projected cash flows.
The projected cash flow, discount rate and long-term growth rate were used for the terminal value
formula. The terminal value formula is projected cash flow for final year (1 + long-term growth rate) / (discount
rate - long-term growth rate) 14
. After finding the terminal value, the information is added to the discount cash
flow formula.

20.
FIN
552
Mergers
and
Acquisition:
Netflix
Valuation
Report
19
NASDAQ
ticker:
NFLX
Sensitivity
Analysis
This technique uses an independent variable to determine the impact on a dependent variable under a set
of assumptions. The sensitivity analysis was constructed to compare the enterprise value based on different
measures of WACC and the exit multiple. The first analysis demonstrates the enterprise value increases as the
exit multiple increases and decreases as the WACC increases. Ideally, the greatest enterprise value would be at a
lower WACC and a higher exiting multiple.
The second analysis shows present value of terminal and enterprise value in another sensitivity analysis.
By using the same exit multiple and WACC values, the terminal value as a percentage of enterprise value is
determined. The calculated percentage of enterprise value is 92.16%. Based on different WACC and exit
multiples the enterprise value is heavily affected by terminal value. The TV controls 92% of Netflix’s valuation.
Slight changes in TV can lead to significant changes in the valuation.

21.
FIN
552
Mergers
and
Acquisition:
Netflix
Valuation
Report
20
NASDAQ
ticker:
NFLX
References (for Macroeconomic Environment)
1. "U.S. Economy at a Glance: Perspective from the BEA Accounts." U.S. Economy at a Glance. Web. 13 Dec.
2015. <http://www.bea.gov/newsreleases/glance.htm>.
2. "U.S. and World Population Clock." Population Clock. Web. 13 Dec. 2015.
<http://www.census.gov/popclock/>.
3. "U.S. Population (LIVE)." Population of the United States (2015). Web. 13 Dec. 2015.
<http://www.worldometers.info/world-population/us-population/>.
4. "Current US Inflation Rates: 2005-2015." US Inflation Calculator. 22 July 2008. Web. 13 Dec. 2015.
<http://www.usinflationcalculator.com/inflation/current-inflation-rates/>.
5. "Consumer Price Index Data from 1913 to 2015." US Inflation Calculator. 17 Nov. 2015. Web. 13 Dec.
2015. <http://www.usinflationcalculator.com/inflation/consumer-price-index-and-annual-percent-changes-
from-1913-to-2008/>.
6. "Employment Situation Summary." U.S. Bureau of Labor Statistics. U.S. Bureau of Labor Statistics, 1 Nov.
2015. Web. 13 Dec. 2015. <http://www.bls.gov/news.release/empsit.nr0.htm>.
7. "Foreign Direct Investment (FDI) Confidence Index® | #FDICI15 | A.T. Kearney." A.T. Kearney. 1 Apr.
2015. Web. 13 Dec. 2015. <https://www.atkearney.com/research-studies/foreign-direct-investment-
confidence-index/2015/publication>.
8. "Foreign Direct Investment in the United States - 2014 Report." Organization for International Investment.
Web. 13 Dec. 2015. <http://www.ofii.org/sites/default/files/FDIUS2014.pdf>.
9. "United States Fed Funds Rate | 1971-2015 | Data | Chart | Calendar." Trading Economics. Web. 13 Dec.
2015. <http://www.tradingeconomics.com/united-states/interest-rate>.
10. "News Release: Personal Income and Outlays." News Release: Personal Income and Outlays. U.S.
Department of Commerce - Bureau of Economic Analysis, 1 Oct. 2015. Web. 13 Dec. 2015.
<http://www.bea.gov/newsreleases/national/pi/pinewsrelease.htm>.
11. "U.S. House Price Index Report - 3Q 2015 / September 2015." Federal Housing Finance Agency. Federal
Housing Finance Agency. Web. 13 Dec. 2015. <http://www.fhfa.gov/AboutUs/Reports/Pages/U-S-House-
Price-Index-Report-3Q-2015.aspx>.