Netflix Report

1QUMMIF 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 when
messy, inelegant you get your
process.” - FX CEO latte...ours is that the
John Landgraf on the website adapts to the
changing media individuals taste" -
landscape Reed Hastings CEO
Netflix
a.zhambyl@hss15.qmul.ac.uk
a.miranda@hss15.qmul.ac.uk

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 averb.
 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 NewBlack”.
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-specificexperience
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 thelong-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 followingperiods.

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.
Price

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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