Netflix Report

1 QUMMIF INVESTMENT CLUB |2012-2016 QUMMIF. All rights reserved www.qummif.org

QUMMIF Equity Research: April 2016

During peak hours Netflix already

accounts for about a third of all internet

traffic in the US

In the first quarter of 2015 Netflix streamed

10 billion hours worldwide

Netflix

"If the Starbucks

“It’s going to be a secret is a smile whenmessy, inelegant you get yourprocess.” - FX CEO latte...ours is that the

John Landgraf on the website adapts to thechanging media individuals taste" -

landscape Reed Hastings CEONetflix

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Table of Contents

Company Snapshot

Company Overview

Financial Snapshot

SWOT Analysis

Industry and Firm Analysis

Firm Analysis

Future Prospects

Competition Comparison

Business Segmentation

Market Operations Breakdown

Fundamental Analysis

Income Statement

Balance Sheet

Cash flow Statement

Capital Structure

Valuation

Dividend Policy

CAPM and ROE Comparisons

Technical Analysis

Support and Resistance Price Points

Analyst Recommendations

Business Risk Analysis

Business Related Risk

Profit Ratio/Loss Risk

Market Oriented Change Risk

Liquidity Risk

Regulatory Risk

Conclusion

Team Recommendations

Disclaimer



Company Snapshot

Report Overview

Netflix operates in the video on demand industry providing customers with access to its

library of films and television series. It is the de facto leader in online video streaming - a

growing and diverse sector - in which only a limited number of competitors operate.

As the industry grows and Netflix expands and asserts its dominance across the globe, we

see that the social movement towards video on demand means that Netflix has

positioned itself as the perfect investment to meet the evolving consumer. This sure footing

ensures that the future growth prospects are tipped in favour of Netflix.

Financial Snapshot

Financial and valuation metrics

Year 12/15 A 12/16 E 12/17 E 12/18 E

Revenue US$ m 6,779.5 8,767.2 11,057.9 13,319.4

1 3 0 0 EBITDA US$ m 368.11 544.77 1,127.67 1,779.43

Net income US$ m 122.64 172.16 617.23 1,133.13

Diluted EPS 0.28 0.46 1.30 2.31

P/E 408.50 219.16 76.94 43.13

EV/EBITDA 133.14 78.47 37.91 24.02

Strengths:

Brand and Brand Management: establishment of their brand in popular culture,

even going so far as to become used commonly as a verb.

Content: a combination of collaboration with industry leaders, e.g. Disney, and a

vastly popular selection of original programming. This original programming has

exploded in popularity in recent memory following the success of shows such as

“House of Cards” and “Orange is the New Black”.

Convenience: Netflix has developed and popularized a stream source that

functions on a wide variety of devices and creates an easily understood user

interface on those individual devices.

Adaptability/Flexibility of the Business Model: the business model of Netflix is easily

adaptable to a wide number of country specific factors, as demonstrated by the

individualised, country-specific experience

Subscription Base: According to the release by Netflix the company reports

having 74.762 million subscribers as of the end of December 2015. With a large

subscription base Netflix has a steady, relatively safe current source of revenue.

Deviation from Traditional Ad Based TV: As Netflix does not inundate its consumer

base with vast quantities of ads the content offered does not suffer from the need

to entice the user once more following an advert as paid television subscriptions,

such as HBO, must.



Weaknesses:

Decline of Original Business Base: DVD subscriptions have continued to decline

annually as consumers shift away from physical copies and more towards online

or cloud based sources. The original base which the company was built on, DVD

subscriptions, have declined almost 50% from 2011 (11.0 million) to 2014 (5.9

Million).

International Profitability: the international business as of third quarter of 2014 was

not yet profitable, with a $274 million contribution loss experienced in 2013. As

Netflix stresses a long-term strategy by targeting further international expansion

these short-term international losses will continue leading to increased uncertainty.

However, this strategy should yield benefits in the long-run.

Consumer Use Trends: Netflix must deal with the flipside of one of its greatest

strengths, convenience. By bringing the content directly to user and providing

user access on numerous devices Netflix must constantly update its material and

provide a vast quantity of material in order to keep consumers attracted to the

service, thus continuing their membership.

Opportunities:

We believe the main opportunity here for Netflix is to expand. Netflix first

internationally rolled out to Canada in September 2010, eventually launching in

many European countries and South American countries. Now they are present in

about 130 countries, and as mentioned above, they plan on expanding to at

least 200 countries by this time next year.

Netflix has started to produce Movies as well recently, we believe that if they were

to continue expanding on the Original Content business they could very well

become a full-on entertainment company producing their own movies and T.V

shows. This combined with the fact of showing it online to their growing existing

customer base could make a killing.

Threats:

The main threat Netflix faces is competition. The online market for streaming

service is constantly subject to change and technological updates. We believe

that in such a market, subject to constant changes, with low barriers to entry the

possibility of increasing competition is high. As of now Netflix has 2 main

competitors in the form of Amazon Prime, a yearly subscription service which on

top of providing the user with free shipping all year long, allows them to access its

instant streaming platform that boasts a lot of content. Secondly, HBO recently

released HBOGO, another online movie subscription service to which customers

can sign up, without necessarily needing an existing, or new membership with

HBO cable T.V. CBS also recently announced the possible introduction of a new

online streaming service.

We believe the black market around the world in the form of downloading is also

a potential threat for Netflix. Increasingly high numbers of young people between

the ages of 20 and 30 download content for free. These customers don’t need a

subscription service at all, and most content is available to them for free.



Industry / Sector Outlook

a) Role of firm in sector?

Netflix has moved from being a DVD orientated video service to being an on demand

streaming library with huge content which stretches across several genres. The firm has

developed itself into a large component in the Video-On-Demand service using

“disruptive innovation” in order to maintain its position as the industry leader.

Netflix role has developed from merely licensing videos from networks to show on its

service to now producing its own original content. The move towards its original content

has given effect to the motto that “content is king” which is seen as the driving force in

ensuring that subscribers keep subscriptions and that new members sign up.

b) Affected by external factors?

The size of the firm has developed substantially. Its performance however is very

dependent on user subscription levels. The effect on its share price is dependent on the

number of new subscribers. External issues are mainly to do with the legal confines of its

licenses which prevent it from showing the same content across all countries that it

operates. This factor is a large preventative force in its development. The growth to new

markets is further hindered by the external dependency it has upon its direct competitors

for content. However, in order to overcome this issue, Netflix has set aside $5 billion in

order to produce its own content to rival that of network television and to reduce its

dependency on competitors.

c) How did the sector perform in the past?

The sector has been growing and as we can see from the table below, the numbers

specifically dealing with Netflix subscriber numbers show that the direction of growth is

only moving in one direction. That direction is bullish expansion which has been spurred

on by its international expansion. What we can see is that streaming is growing while at

the same time demand for DVD is falling. Despite this, Netflix shows excellent growth

across both domestic and international markets.

d) Future prospect of sector?

The global VoD service market was valued at $45.03 Bn in 2014 and is expected to

expand at a CAGR of 8.3% during the forecast period (2016–2026). Shift in preference of

viewers from television’s linear schedule to viewing content as per their convenience

and increasing penetration of high speed Internet network in emerging nations are

factors propelling market growth currently. The evolving nature of societies viewing

habits has resulted in the number of people “cutting their ties to cable”. The further



example from a PWC report suggests that “one in three households in the US now has a

Netflix streaming SVOD subscription” with an estimate that it will rise to almost half in the

next 5 years.

Comparative Valuation

As is clear from the graph below depicting the normalized price of Netflix, compared to

both the peer index and the benchmark, represented by the S&P 500, Netflix has

experienced tremendous growth. It is evident that from the normalized data that Netflix

has vastly outperformed both the benchmark and the peer index, typically by an

exorbitant margin over the five-year period analysed. The normalized data additionally

points out something incredibly interesting regarding Netflix, its apparent volatility. The

normalized price data has shown massive volatility declining almost 100 units from

August 2011 to November 2011. However, this massive volatility is not unexpected in a

high growth, elastic product service, such as Netflix. Furthermore, the growth potential as

shown by the rebound from declines in the normalized data demonstrate Netflix’s

potential for continued future growth.

Figure 2

It is the belief of this report that currently the market is in the early bull phase of the

economic cycle. Being a technology driven company Netflix may begin to experience

an appreciation typically associated with the technology sector as the economic cycle

transition from the early bull to the middle bull phase of the economic cycle. As the

economic cycle continues to progress it is our view that those technology securities,

especially those deemed as elastic goods will experience a benefit. This belief is rooted

in the theory that as the consumer base collects a greater, steadier source of

expendable income in addition to a lessening fear and uncertainty over economic

security they will increase expenditure on goods, with elastic goods experiencing the

greatest relative increase. This economic cycle as described is depicted in the

subsequent graph. The equity should be moving between number 5 and 7 on the graph.

NFLX Price versus Peers & Benchmark (Normalized)

780

680

580

480

380

280

180

80 Jan-10 Jun-10 Nov-10 Apr-11 Sep-11 Feb-12 Jul-12 Dec-12 May-13 Oct-13 Mar-14 Aug-14 Jan-15

NETFLIX INC Peer Index SPX



Table 1

The above table compares Netflix’s financial metrics relative to those companies

deemed as similar by Bloomberg. Such a considerably higher P/E ratio comparatively

may reflect a high expectation of high future earnings potential. This belief would

correspond with Netflix’s aggressive expansion strategy in international markets where

short-term contribution losses, such as $274 million in 2013, are tolerated as necessary to

attain long-term goals. Furthermore, Netflix outperforms an established technology giant

in Yahoo in financial metrics, such as total revenue and growth. With regards to growth

an important justification in the relatively high P/E ratio Netflix has even outpaced

Alphabet following its evolution from Google. The financial metrics and multiples of

Netflix as compared to its alternatives seem to indicate a solid fundamental base.



Business and Geographic Segmentation

The main proportion of revenues comes from streaming and the company is reducing its

reliance on DVD. Moreover, international markets are becoming more critical, with

overseas sales exposure of around 30% of total revenue versus 16% two years ago. As

domestic markets mature the company is struggling with slowing domestic growth while

international markets are bolstering subscriber numbers. Netflix has expanded its streaming

service to additional 130 countries including India and Russia. India has 17 million

broadband households and the basic company’s plan costs $7.50 per month in India.

Netflix projected 1.75 million more domestic subscribers in quarter 1, which makes 23%

drop in respect to the previous year. However, the company estimated 4.35 million more

international customers in the same period. The growth of the company is in respect to

190 countries, with the only significant exception of Chinese market where it hasn’t

determined the launch date.

Business Segments in $ (2015Mln.)

Streaming 6,134.00

Domestic DVD 646.00

9% Geographic Segments in USD (sales mln.) (2015)

29%

62% United States

International Streaming

10%

Business Segments in USD

(2015Mln.)

Streaming

90%

Domestic DVD

Geographic Segments in $ (sales mln.)

(2015)

United States 4180

International Streaming 1953

Domestic DVD 646



Fundamental analysis

Income statement

The company revenue stream has been growing steadily at an average pace of above

20% per year. But due to a pricing mishap in 2012 the company lost a lot of subscribers,

and as a result the revenue growth for that year dropped to 12%. Netflix operating

margins are experiencing pressure mainly due to its international segment, as the

company expands into new markets. The gross profit margins were around 30% at the

end of the last year, and company is targeting to achieve about 40% by 2020. Netflix is

facing huge competition from Amazon and Hulu, and bids aggressively for content. So

the multiyear content commitments were over $10 billion in the forth quarter and will rise

with increased investment as part of accelerated aggressive expansion.

Netflix expects a 30% sales increase and up to 81 million global subscribers in the

nearest time.

Income statement (in millions $)

31/12/2009 31/12/2010 31/12/2011 31/12/2012 31/12/2013 31/12/2014 31/12/2015

Total

Revenue

1,670.27 2,162.63 3,204.58 3,609.28 4,374.56 5,504.66 6,779.51

Growth

Over Prior

Year

22.39% 29.48% 48.18% 12.63% 21.20% 25.83% 23.16%

Gross Profit 591.00 805.27 1,164.68 983.42 1,291.31 1,751.90 2,188.04

Margin % 35.38% 37.24% 36.34% 27.25% 29.52% 31.83% 32.27%

EBITDA 229.98 321.74 419.82 95.46 276.72 456.68 368.11

Margin % 13.77% 14.88% 13.10% 2.64% 6.33% 8.30% 5.43%

EBIT 191.94 283.64 376.07 49.99 228.35 402.65 305.83

Margin % 11.49% 13.12% 11.74% 1.39% 5.22% 7.31% 4.51%

Net Income 115.86 160.85 226.13 17.15 112.40 266.80 122.64

Margin % 6.94% 7.44% 7.06% 0.48% 2.57% 4.85% 1.81%

The main operating expense of the company comes from general administration and

research & development expenses. So the company was increasing its annual above

mentioned expenses by more than 30% per year during the last 5 years. As a result, EBITDA,

EBIT, and net income margins of the company were below 10% during the last few years.

That means that Netflix rapidly expanding its operating activity, which as we presume will

bring significant profits in the following periods.



31/12/2015

31/12/2014

31/12/2013

31/12/2012

31/12/2011

31/12/2010

Net Income

EBIT

EBITDA

Gross Profit

Total Revenue

0.00 1,000.00 2,000.00 3,000.00 4,000.00 5,000.00 6,000.00 7,000.00

60.00%

50.00%

40.00%

30.00%

20.00%

10.00%

0.00%

Balance Sheet

YOY growth of REVENUE

Gross Profit Margin %

EBITDA Margin %

EBIT Margin %

Net Income Margin %

The company is systematically expanding its asset base, and since 2010 Netflix increased

its assets by more than 10 times. The proportion of equity to liabilities on average has

been around 70:30 during the corresponding period.

Balance

Sheet (mln $)

FY 2010 FY 2011 FY 2012 FY 2013 FY 2014 FY 2015

31/12/2010 31/12/2011 31/12/2012 31/12/2013 31/12/2014 31/12/2015

Total Assets 982.07 3,069.20 3,967.89 5,412.56 7,042.50 10,202.87

Total

Liabilities

691.90 2,426.39 3,223.22 4,079.00 5,184.79 7,979.45

Total Equity 290.16 642.81 744.67 1,333.56 1,857.71 2,223.43



Total Equity

Total Liabilities

Cash Flow Statement

Cash flow from operating activities was growing stably before 2012, but as mentioned

previously due to pricing mishap in 2012 the company lost a lot of subscribers and the

operating cash flow dropped to $21 million of from previous $317 million. In 2015 the cash

flow from operation plunged to -$750 million mainly due to other non-cash adjustment.

The cash flow from investment on average was around $100-$200 million per year, and the

main cost items were acquisition of fixed product assets and acquisition of intangible

assets, which mean that company is expanding its content base, which as we assume

should bring more customers to the company.

The investment cash flows of the company during the last 5 years were mainly financed

by the cash flow from financing activities and the company was rapidly increasing its long

term debt up to $1500 million in 2015. The rest of the financing came from increase in stock

capital.

Cash Flow (mln. $) FY 2010 FY 2011 FY 2012 FY 2013 FY 2014 FY 2015

31/12/2010 31/12/2011 31/12/2012 31/12/2013 31/12/2014 31/12/2015

Cash from Ops. 276.401 317.712 21.586 97.831 16.483 -749.439

Cash from -116.081 -265.814 -244.74 -255.968 -42.866 -179.192

Investing Cash from

Financing

-100.045 261.656 5.392 472.811 535.026 1624.353

Net Change in 60.275 313.554 -217.762 314.674 508.643 695.722

Cash

100%

80% 642.81 744.67 1,333.56 1,857.71 2,223.43

290.16

60%

40%

20% 5,184.79 7,979.45

4,079.00

0% 691.90 2,426.39 3,223.22



2000

1500

1000

500

0

Cash from Ops.

Cash from Investing

Cash from Financing

Net Change in Cash

-500

-1000

Capital Structure

As we can see from the data provided the majority of the capital comes from equity or

historical market capitalisation. That was due to fast growth of the stock price which was

tenfold during the last few years, from less than $10 per share to more than $100 in 2015.

This aspect tells about stability of the company’s capital structure. But Netflix as mentioned

before was rapidly increasing its long term debt in the last few years, which as we assume

would decrease WACC in the coming periods, that is due to the tax shield and cheapness

of debt with respect to equity. Moreover, if the interest rates remain low in upcoming

periods, the WACC would decrease.

Capital

Structure

FY 2011 FY 2012 FY 2013 FY 2014 FY 2015

31/12/2011 31/12/2012 31/12/2013 31/12/2014 31/12/2015

Cost of Equity 9.6% 9.4% 12.0% 12.6% 12.7%

Weight of 95.0% 96.3% 97.8% 95.9% 95.4%

Equity

Cost of Debt 1.9% 1.6% 3.2% 2.7% 3.3%

Weight of Debt 5.0% 3.7% 2.2% 4.1% 4.6%

WACC 9.2% 9.1% 11.8% 12.2% 12.3%

31/12/2015 4.6%

95.4%

Weight of Equity

Weight of

Debt



Valuation

DCF valuation

If DCF valuation method is used, the average WACC of the last 5 years, is equal to 10.9%.

Perpetuity growth rate is taken as 5.9% (which is very close to the average free cash flow

growth rate during the last 6 years). So as estimated by DCF method, value per share is

$98, which tells that stock is overvalued. However, the value per share estimated by the

EBITDA multiple valuation method is $585 (highly undervalued). In contrast, if we assume a

more optimistic view about perpetuity growth (WACC 10.9% and perpetuity 7%) the

company price of $123.86 per share is calculated meaning that it is undervalued.

Actual

In millions $ Dec 10 A Dec 11 A Dec 12 A Dec 13 A Dec 14 A Dec 15 A

Revenue (Estimate

Comparable)

2,162.63 3,204.58 3,609.28 4,374.56 5,504.66 6,779.51

% YoY Growth 29,5% 48.18% 12.63% 21.20% 25.83% 23.16%

EBITDA 315.65 438.32 95.46 276.72 456.68 368.11

% Margin 14.60% 13.68% 2.64% 6.33% 8.30% 5.43%

Free Cash Flow 130.94 353.88 -30.05 244.49 289.30 239.05

% Margin 6.05% 11.04% -0.83% 5.59% 5.26% 3.53%

WACC 9.2% 9.1% 11.8% 12.2% 12.3%

Expected

In millions $ Dec 16 E Dec 17 E Dec 18 E Dec 19 E Dec 20 E Dec 21 E

Revenue

(Estimate

Comparable)

8,767.23 11,057.90 13,319.40 15,719.56 18,294.31 20,452.00

% YoY Growth 29.32% 26.13% 20.45% 18.02% 16.38% 11.79%

EBITDA 544.77 1,127.67 1,779.43 2,865.90 4,118.40 5,121.17

% Margin 6.21% 10.20% 13.36% 18.23% 22.51% 25.04%

Free Cash Flow 415.55 195.99 1,149.80 1,937.87 2,807.05 3,374.35

% Margin 4.74% 1.77% 8.63% 12.33% 15.34% 16.50%

14.0%

12.0%

10.0%

8.0%

6.0%

4.0%

Cost of Equity

Cost of Debt

WACC

2.0%

0.0%

31/12/2011 31/12/2012 31/12/2013 31/12/2014 31/12/2015



Present Value of

Free Cash Flow

(5 Years)

310.81 171.71 908.32 1,380.41 1,803.03 450.31

WACC 10,9% 10,9% 10,9% 10,9% 10,9% 10,9%

WACC average 10.9%

perpetuity growth rate 5.9%

Present Value of Perpetuity (10.9% WACC) 37,027.23

(+) Present Value of Free Cash Flows ( 10.9%

WACC)

5,024.58

(=) Current Enterprise Value 42,051.80

(=) Equity Value 41,991.16

Shares outstanding 428.00

Estimated Value per Share ($) 98.09

Current Price ($) 101.88

Estimated Upside -4.0%

EBITDA multiple valuation

EBITDA Multiple method

WACC 10.9%

Exit Enterprise Value / EBITDA 94.90

Terminal Value at End of Year 5 411,914.60

Present Value of Terminal Value (@ 10.9%

WACC)

245,555.38

(+) Present Value of Free Cash Flows (@ 10.9%

WACC)

5,024.58

(=) Current Enterprise Value 250,579.95

(=) Equity Value 250,519.31

Estimated Value per Share ($) 585.21

Current Price ($) 101.89

Estimated Upside 474.0%

Present Value of Free Cash Flow (5 Years)

2,000.00

1,500.00

1,000.00

500.00

0.00

Dec 16 E Dec 17 E Dec 18 E Dec 19 E Dec 20 E Dec 21 E



Dividend policy

The company hasn’t paid dividend to its shareholders at all. However, share price during

the last 6 years has been growing rapidly and increased 10 times from below $10 per share

to more than $100 in 2015, which means that company is creating huge value and using

earnings as growth capital.

Comparing CAPM and ROE

In order to understand whether the shares of the company are overvalued or undervalued

we decided to expand our analysis and compare CAPM and ROE. According to the

results obtained in 2010, 2011, 2013 and 2014 return on equity shown much higher profits

than CAPM (undervalued), in contrast in 2012 (due to a pricing mishap) and in 2015 (due

to high non-cash adjustments) the ROE profitability ratio dropped dramatically and was

lower than CAPM (overvalued).

% 12/10 12/11 12/12 12/13 12/14 12/15

Return on Equity 66 48 2.47 10.82 16.72 6.01

Risk free rate 3.29 1.88 1.76 3.03 2.17 2.27

equity risk premium 5.16 7.73 7.67 8.94 10.39 10.44

CAPM(As

December)

at 8.45 9.61 9.43 11.97 12.56 12.71

Despite contrasting results in different valuation methods we still believe that shares of

Netflix are very attractive due to several reasons. First of all, there is a clear trend that

people changing their preference to streaming rather than TV. The company recently

spent huge amount of money on marketing and content commitments, which should

increase company’s customers’ base in the near future. Moreover, Netflix is rapidly

expanding its activity on emerging markets, which also has a positive impact on

company’s growth. In addition, we assume if the company doesn’t make the crucial

mistakes as the pricing mishap in 2012 (the shares of the company dropped below $10 per

share), Netflix should expect significant growth in upcoming periods.

CAPM and ROE

70.00

60.00

50.00

40.00

30.00

20.00

10.00

0.00

2010 2011 2012 2013 2014 2015

Return on Equity CAPM(As at December)



Technical Analysis

The price movement over the last year and the technical analysis undertaken to

understand the potential future movement of the security leads to a favourable opinion

on the future of Netflix. The one year weekly open price movement was used to establish

a baseline for the analysis. Plotting of weekly price data from the past year developed a

support level of $58.769, a local support of $80.57, a resistance level of $131.19, and a local

resistance point of $112.13. This is depicted in the below figure.

This initial hypothesis of an upwards movement in the weekly one-year price data is

corroborated by the trend channel of the price, which suggests an upwards price

movement.

From the above figure an initial hypothesis of a further upwards pressure on the security

price. This hypothesis was further analysed using Fibonacci retracements of the weekly

one-year data, as shown in the below figure. The Fibonacci retracements show that the



security price has not retraced passed a 50% or 61.8% level. Although the price has

retraced to around 38.2%, the decrease in volume may suggest the solidification of the

security price as it establishes a base for future increases or potentially a stagnation of the

security price.

To understand if this solidification is temporary and future upwards movement will occur;

or if the security price is stagnating and moving sideways analysis using Bollinger Bands

was undertaken, as depicted in the below figure.



The data is from one-year weekly price data. The lower Bollinger band was broken

meaning according to the “double bottoms” strategy the low may once more be tested

in the near future. However, the volume drop-off has been a dramatic decrease

potentially signalling a shift from sellers to buyers. As this occurs the price will continue to

increase. The investor should proceed with caution as no confirmation of the signal has

occurred, i.e. returning to touch the lower Bollinger band, and therefore this strategy might

lead to an erroneous conclusion that the security will experience an upwards pressure.

Without a confirmation the recent upwards movement in the security price might be a

false buy signal. This lower band break however, followed a double confirmation where

the upper band was broken in July, retested in August, and again retested in December.

The security price then corrected and this dip in price that resulted in lower Bollinger band

being broken may simply be a correction of this past upper band break. Combined with

the analysis from the Fibonacci retracements and the support and resistance lines could

together suggest a future increase. As although the analysis points to a future increase in

the security price as it further retraces, RSI was undertaken. The results of such analysis is

depicted below.

A 14-day residual strength index of 47.8479 means that the equity has not broken the

threshold of 70 where it would be considered overbought, suggesting a potential future

sell off. As the current level is below this threshold the equity should be considered to be

purchased. Although it is below 70 as 47.8479 is higher than 30, the threshold were the

security is considered oversold, this number should be carefully followed in the future, so

as not to hold on passed the window where profitability is sacrificed and it is considered

overbought. That being said the RSI does not contrast the observations drawn from the

other analysis sources, and therefore it is conclusion of the technical analysis of Netflix that

the security will further retrace in the future.



Analyst Recommendations

140

120

100

80

60

40

20

0

Mar-15 Jun-15 Sep-15 Dec-15 Mar-16

Analyst Price Target

Stock Price

Consensus Price Target

The above figure depicts the comparisons of the stock prices and those price targets of

other analysts as produced by Bloomberg. The price target of the consensus is $126.00.

This increase from the current security price affirms the conclusions drawn from the

fundamental and technical analysis. Furthermore, as shown in the figure below over 50%

of analysts recommend to buy the security, expecting as the target suggests that the price

of the security will increase in the future.

Pri

ce



Risk Related to the Business

The latest data showed that YouTube still has the largest advantage in the U.S.

multimedia market share. Lack of core technology within Netflix and its reliance on its

competitors such as Amazon can put its growth at odds with future success. This is mainly

due to Netflix’s reliance on Amazon Web Services (AWS), commonly described as the

‘cloud computing infrastructure platform’ for business operation. In addition, Amazon is

the main competitor of Netflix in the retail side so that AWS’s operation will adversely

impact Netflix’s business. The stock price of 28/3/2016 could show this, boosting to $101

from $98 per share after Netflix announced the recruitment of Google in fighting cyber

pirates. This collaboration demonstrates increased investor willingness to see more

cooperation rather than competition between these companies.

Profit Ratio Loss Risk



Netflix’s focus on its streaming services and has started to expand its global share from

2010, depicted in the table above, it shows that the paid memberships of international

streaming segment at the year-end grow continuously fast from 10930k to 30024k in two

years, nearly 274% growth rate. Following this trend, customers from international markets

will exceed domestic customers in

less than two years. But the

average monthly revenue per

paying membership decreased to

the $7.48 per person. This statistic

is less than the standard

membership price level, showing

that less customers have been

willing to use the premium

membership and a greater

willingness of purchasing basic

membership. Compared to the

domestic streaming segment, American local market is still growing and gaining more

profitable customers. The risk of this shift is global expansion will lower down the company

profit ratio, potentially caused by the background of Netflix limiting their ability to push

proper content to target customers. Maybe international customers consider current

price levels too high to accept or they do not have such strong need of the video

entertainment.

Market Oriented Change Risk

and the development strategy of the company.

The table on the left is the

operating expense part of the

income statement of Netflix.It is

clear that as the firm expands

internationally, this expense will

continue to grow. This will help

transform Netflix from a local-

oriented company to a global-

oriented company. The change

of movement will directly

influence corporate transition



Liquidity Risk

The cash flow part of Netflix on the right

points out several problems.

The first is a significant increase in the

financing cash part, which is almost

three times the previous years $1.5 billion

is long-term debt, allocated to fund

content acquisition and other general

purpose acquisitions. This will lead to a

greater long-term interest burden to the

company. This is demonstrated through a

cash paid for interest of almost 1/3 of

2015 EBITDA increasing the company

default risk by 2% from early 2015.

The second main risk could be caused

by the foreign exchange floatation.

Increased foreign income and growing

trade with international consumers will

cause this number to increase in the

future. Greater correlation with the

international market and normal

fluctuation of currency exchange rate

will cause a net loss of the company’s

cash flow.

Regulatory Risk

The risk of government regulations related to the internet may cause subscription issues.

In the case of the newly released TV series such as Marco Polo the problem of internet

restrictions resulted in the fact that it cannot be viewed in China. As a result, a loss of

subscribers resulted from this fact alone which shows the vulnerability to regulatory issues

around the world. The compliance issues that will result therefore are only going to

increase in the future.

Cashflow

2012 2013 2014 2015

Cash from Financing Activities 5.59 476.26 541.71 1640.28

Effect of Foreign Exchanges -0.20 -3.45 -6.69 -15.92

Net Changes in Cash -217.76 314.67 508.64 695.72

Cash Paid for Taxes 28.85 7.47 50.57 27.66

Cash Paid for Interest 19.01 19.11 41.09 111.76

EBITDA 95.46 276.72 456.68 368.11

Trailing 12M EBITDA Margin 2.64 6.33 8.30 5.43

Net Cash Paid for Acquisitions 0.00 0.00 0.00 0.00

Tax Benefit from Stock Options 4.54 81.66 89.34 80.47

Free Cash Flow -18.69 43.69 -53.24 -840.69

Free Cash Flow to Firm -7.45 62.84 -14.89 -725.97

Free Cash Flow to Equity -21.31 313.73 345.66 658.77

Free Cash Flow per Basic Share -0.05 0.11 -0.13 -1.97

Price to Free Cash Flow 490.45

Cash Flow to Net Income 1.26 0.87 0.06 -6.11



Conclusion

The findings of the report have found that the prospects of Netflix are indeed one of the

best available for an investment. The evolving structure of viewing habits around the

world has resulted in Netflix’s medium to long term prospects being fantastic.

The financial analysis of the company shows that Netflix is experiencing steady growth.

Despite fluctuations in cash flow and high volatility of stock price Netflix has huge

potential. The company is actively increasing its expenses on content and expansion to

international markets, which as we know helps in diversification and stabilization of the

company’s income. Despite the DCF and multiple valuation methods show contrasting

results, the positive DCF valuation scenario shows the price of around $123 per share,

which is very close to the analysts’ consensus target price ($126 per share). In addition,

due to the company’s recent investment, market and expansion policy, we believe that

company will generate high profits in the upcoming periods.

The liquidity risk due to taking on long term debt has raised these risks and the financial

burden on the company. While at the same time, the lack of ability to enter the Chinese

market is problematic but not necessarily a hindrance to the growth of the company.

The conclusions drawn from technical analysis suggests a future upward movement of

the security price of Netflix. The analysis was undertaken using Bollinger Bands, 14-day

RSI, Support/Resistance Line, and price movements using weekly one-year price data for

all analysis with exception of the 14-day RSI, where 5-year data was used. The analysis

from the sources suggest and appear to corroborate the view that a future, upwards

price movement is probable. Furthermore, the security price movement seems to be

trending along an upwards channel as it retraces from the low it experienced in late

January, 2016. With all indications the conclusion of the technical analysis is of a

favorable, upwards future price movement.



Global Disclaimer:

The information and opinions in this report were prepared by Queen Mary, University of

London Postgraduate Investment Club (QUMMIF). QUMMIF makes no representation as to

the accuracy or completeness of such information.

All opinions expressed herein are subject to change without notice. The document is for

information purpose only.

Descriptions of any futures, options or other derivative products mentioned herein are not

intended to be complete and this document is not, and should not be construed

expressly or impliedly as, an offer to buy or sell products.

QUMMIF does not accept any liability whatsoever for any direct or consequential loss

arising from any use of the materials contained in this document.


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