Scout Walker

Equity Analysis Report

Fall 2022
 Netflix
Ticker Market Sector Industry

NFLX Consumer Disc. Media and Entertainment

Netflix Stock(R) compared to SPY(O)

Investment Thesis

I recommend a buy and hold for Netflix. My

valuation estimates that the target price range for
the over ten years is $418.13-$506.98. At the time
of writing Netflix is trading for 320.41 dollars per
share my estimate would mean there is an implied
upside of 44.36% over the next ten years. Currently
Netflix has the prospects of future growth because
of their ad-based plan and interests in game
development sports streaming.

Price Data Important Assumptions

Netflix’s intrinsic value is based upon the revenue
Current Price(Dec
growth will continue to grow at a compound growth
2nd) $320.41 rate of 27.45% over the next ten years beginning in
Relative Value $ 332.18 2021. The projected rate is assumed that Netflix will
continue to perform at its current capabilities and
various factors including current management,
Key Statistics
future projects, and subscriber feedback.
Market Cap $142,589,016,482.54
Shares Outstanding 445,020,494
Beta
Number of Subscibers
1.245
250,000

Price/Earnings
256.3 200,000
(2022)
Price/Earnings 150,000
26.38
(2023 ytd)
100,000
Profitability
Return on Assets - 13.64% 50,000

Return on Equity - 38%

0
2017 2018 2019 2020 2021 2022

1
 Table of Contents

Profile ………………………………………….………………………………………….……………….……………………..1
Investment Thesis ………………………………………….…………………………………………………………….1
Important Assumptions ………………………………………….……………………………..…………………….1
Company Overview ………………………………………….………………………………………………….………….3
Company Description ………………………………………….………………………………….………..………….3
Company History ………………………………………….………………………………………..…………………….3
Industry Analysis ………………………………………….………………………………….………………………….4-6
Pricing ………………………………………….……………………………………………………………………………….4
Products and Services………………………………………….………………………………………….…………….5
Current changes and Interests ………………………………………….……………….………………………….5
Risk Variables Influencing Netflix……………………………………………………..…………………………….6
Netflix Management and Leadership…………………………………………………………………….……….6
Porters Five Forces………………………………………….…………………………………………….………………6-7
Threat of New Entrants………………………………………….……………………………………………………….6
Degree of Rivalry………………………………………….……………………………………………………..………….6
Threat of Substitutes ………………………………………….………………………………………………………….7
Bargaining Power of Buyers ………………………………………….………………………………………….…….7
Bargaining Power of Suppliers ………………………………………….…………………………………………….7
Profitability Analysis………………………………………….………………………………………….………………7
Netflix Common Size Income…………………………………………….…………………………………………….7
Risk Analysis………………………………………….……………………………………………..……………..………….8-9
Intrinsic Valuation………………………………………….……………………………………………………..……….9
Cost of Equity………………………………………….……………………………………………………………………….9
Revenue Projection………………………………………….…………………………………..………………………….9
Free cash flow ………………………………………….…………………………………………………..……………….9
Relative Valuation………………………………………….…………………………………………..………………….10
Important Assumption………………………………………….……………………………………….…………….10
Ratios………………………………………….………………………………………………………………….……………………11
Common Sized Statements ………………………………………….………………………………..………….12
Revenue and Free Cashflow Projection ………………………………………….…………….………12
Bibliography………………………………………….……………………………………………………………………..……13

2
Company Overview Company History
Netflix was founded in 1997 near the height of the
Company description dot com bubble. It would offer DVDs for purchase
Netflix Inc. (NFLX) is a media company offering rent out on an online catalogue. This model had
streaming entertainment subscriptions. Its digital issues generating profit for the company because
platform allows subscribers to stream TV series, of the turnover rates and. In 1999 Netflix
documentaries, and feature films on demand. The transitioned from a purchase rent out per DVD to
company also offers a range of video games. a subscription-based model. (Jain, 2022) This
Though most consumers access the most popular allowed the company to have a monthly recurring
Netflix content online, the company still offers its revenue. In 2007 Netflix made another large
original DVD-by-mail service, although in recent transition. Netflix launched its Video on Demand
years membership subscriptions for their online platform. This platform allowed users to have the
services take up a majority of the company's benfits of the library of media they offer at a click
revenue. Streaming services are available in four of a button. “As more people began tuning into
different tiers, with higher-cost subscriptions Netflix, content providers found that Netflix
offering streaming to additional devices and in helped build audiences for their shows. Cable
higher definition. networks making past seasons and episodes of
Revenue Sector Distribution their television series available on Netflix enabled
content discovery. Customers discovering quality
cable content on Netflix would later help people
tune into the currently airing episodes of the
series. This helped boost ratings for television
shows such as Breaking Bad and Mad Men, both
produced by AMC. Ratings for Season 5 of
Breaking Bad were more than double those of
Season 1, and many times the ratings of Season 1,
largely helped by the audience that Netflix
generated for AMC.” (Jain, 2022)

(Jay, 2022)
Netflix’s service spans across 190 different
countries. Although it is still considered a single
business unit, Netflix does break out its streaming
revenue by four broad regions: the United States
and Canada; Europe, Middle East, and Africa; Latin
America; and Asia-Pacific (Reiff, 2022)
(Shafer, 2022)

3
In 2013 Netflix would launch its own original Unlike their other ad-free plans, ads will be shown
content on their streaming platform called House before or during most TV shows and movies.
of Cards. “Netflix would continue to make their Some movies and TV shows will not be available
own originals, at the same time their analytics due to licensing restrictions, and downloads are
team was implementing a recommendation not included. (Netflix, n.d.)It is certain there is a
system for their media. market for their ad-based pricing plans as Hulu’s
The analytics team took in various factors, current ad-based plan takes up 70% of their 82
including the popularity of the genre, how popular million users. (Munson, 2019) Their ad-based plan
an actor/ director is, and even computing would also have the added benefit of having
responses to similar content to recommend to the advertisement revenues. A study considering the
users of the platform.” number of users switching from their already
(Jain, 2022) established plans found that over one-third of
users would be more than likely to switch to the
ad-based plan.

Industry Analysis

Netflix Membership Pricing (USD)

Basic with ads*: $6.99/month
Basic: $9.99/month
Standard: $15.49/month
Premium: $19.99/month

(Shafer, 2022)
Netflix Basic with ads is an ad-supported
subscription plan that allows you to enjoy movies (Shafer, 2022)
and TV shows at a lower price. With this plan, you Another Study was conducted to view the
can enjoy Netflix in HD video quality (up to 720p) number of households that don’t use Netflix that
on one supported phone, tablet, computer, or TV
at a time. You also have access to Netflix
games without any ads.

4
would consider an ad-based plan.

(Shafer, 2022)

Current changes and Interests

Netflix recently implemented their ad-based
membership on Nov. 3. They issued this plan to
compete with ad-supported plans from services
like Hulu and Peacock. The ad-based membership
is meant to help combat the massive amount of
password sharing on the streaming platform.
Having the ad-based membership will also allow
the company to have a source of revenue
(Shafer, 2022) separate from memberships. (Vega, 2022)
Netflix has recently looked at new types of
Products and Services
media it could add to its streaming site. “Recently
Netflix bid for the streaming rights for the ATP
Netflix offers a variety of membership plans at
tennis tour for some European countries,
different monthly issued pricing points. (Netflix
including France and the U.K., but dropped out of
Inc., 2022)
the bidding. Netflix executives have considered
buying lower-profile leagues to avoid the
Services
mounting costs of bidding for sports rights,
“Netflix’s primary source of revenues is from
according to the report, while some of them
monthly membership fees. Members are billed in
believe they could boost lesser-known sports into
advance of the start of their monthly membership
franchises given the size of the platform.” (WSJ,
and revenues are recognized over each monthly
2022) Netflix’s Interest in other media from
membership period.” (Netflix Inc., 2021)The
movies and tv shows
membership includes more than 40 exclusive
Netflix has also gotten into producing and
video games, and thousands of movies and TV-
providing exclusive and non-exclusive video game
shows. Netflix also sells merchandise to go along
titles. Currently they have 43 games listed on their
with some of their exclusive titles. The
app. These games have a focus on party games
merchandise they offer takes up a very small
such as Exploding Kittens or single player Indie-
percentage of their total revenue, so it was
games and games such as moonlighter.
considered marginal.
Netflix is also looking to further expand their
influence in this medium. Late November Netflix
posted several job listing for positions such as
Game Director of Games Studio, Lead Engineer of
Games Studio, and many other positions

5
surrounding the Games Studio. In the job Artificial Intelligence from Stanford University, and
descriptions they are looking for employees to has unique management and industry insights.”
help develop a AAA pc game. They also (Netflix Inc. , 2022)
incentivized interest in someone who has
experience with either first or third person TED SARANDOS
shooter games. (Lahiri, 2022) CO-CHIEF EXECUTIVE OFFICER
Ted has been responsible for all content operation
Risk Variables Influencing Netflix since 2000, and led the company's transition into
original content production that began in 2013. He
Piracy, is the most prominent threat to Netflix. helped with the launch of many of the series that
Consumers pirating content disregards Netflix’s Netflix credits it’s growth from 2013-2020
mainstream of membership revenue, because it towards. Some of these series include House of
makes all content free. Piracy is especially relevant Cards, Arrested Development and Orange is the
in today’s world where information is easy to New Black, among numerous others. (The Org,
obtain. Other social platforms, especially short 2020) Ted Sarandos is expected to continue his
form content, are also relevant to the element of role as CO-CEO until 2023. (Netflix Inc., 2021)
piracy. Short form content users will upload
summations of media that Netflix provides for it’s Porters Five Forces
members for no cost. (Netflix Inc., 2021)
Since most of Netflix’s streaming content Threat of New Entrants
is based off of multi-year contracts and Starting out in the streaming environment is hard
commitments their flexibility to cancel projects at the current moment because of the large
and media is either very expensive or non- number of different platforms offered. These
cancelable. platforms are bound to fail unless they are able to
“Netflix also has a substantial amount of provide exclusive content that other streaming
indebtedness and other obligations, including services cannot. Therefore, the threat from brand
streaming content obligations, which could new competitors entering the space is low.
adversely affect our financial position. The Biggest threat would be from companies with
From time to time, we are subject to litigation or established media and entertainment markets or
claims that could negatively affect our business companies with a large amount of cash like Disney
operations and financial position.” (Netflix Inc., or Apple. Both companies have the cashflow to
2021) invest in a streaming service and offer their own
Netflix cloud system is provided by Amazon Web exclusive content. Maybe larger companies like
Services. Currently they run a vast majority the Microsoft, Sony or Google could enter this realm
computing on Amazon Web Services. This means as well.
that Netflix’s performance is directly related to
the performance of Amazon’s cloud computing Degree of Rivalry
services (Netflix Inc., 2021) Currently the streaming space has a large degree
of rivalry, in many different forms. There are
Netflix Management and Leadership companies doing the same thing as Netflix, in
offering exclusive and non-exclusive shows to
Reed Hastings watch. There are also companies like YouTube
CO-CHIEF EXECUTIVE OFFICER which doesn’t produce its own exclusive content,
“Mr. Hastings, as co-founder and Co-Chief but has users produce it for them at essentially no
Executive Officer, deeply understands the cost.
technology and business of Netflix and brings There is also other forms of entertainment that
strategic and operational insight to the Board. He take up Netflix’s revenue. Social media companies
is also a software engineer, holds an MSCS in

6
like Meta and Tik Tok can take time spent on targeted to film and video media where Amazon
Netflix’s streaming platform. and Disney have large amusement parks and
warehouses that could add a discrepancy in the
Threat of Substitutes comparison.
There is a large threat of substitutes in social
media content, and other forms of entertainment. Netflix Common Size Income
Especially considering how connected and When comparing Netflix to Paramount and
information available the world is today. Warner Bros I chose to start with Gross Margin. I
Companies like Microsoft, EA, Sony, Snapchat feel as though the spending that the company is
offer games and services that could take up a putting into the media they are producing is a
user’s subscription expenditures and time. good indicator that they have quality media that
will attract new subscribers and viewers.
Bargaining Power of Buyers
The Bargaining power of the buyers is high. Gross Margin
Consumers don’t really need Netflix’s service, It is 100.00%
a form of entertainment. There are also many
other services that either offer the same show or 50.00%
movie or a similar genre of show or movie that
Netflix’s offers. If the users sees a cheaper 0.00%
subscription that offers the same or similar 2015 2016 2017 2018 2019 2020 2021
content they will more than likely switch to that Gross Margin PARA
platform. Gross Margin NFLX
Gross Margin WBD
Bargaining Power of Suppliers
The bargaining power of the suppliers is very low. (Netflix Inc., 2021)
They offer separate tiers for separate prices, but Netflix’s spending relative to it’s revenues have
this can only be priced relative to other companies gone down 9.36% since 2015. This is a good sign in
in the same market. Netflix does now have the Netflix’s situation because of the large amount of
large advantage of setting prices for companies traffic and media they produce. Paramount’s and
wishing to advertise on their website. At the Netflix’s spending is also much larger when
current moment though it is hard to see how well compared to Warner Bros. Paramount and Netflix
this advantage is being implemented because the have very similar spending in 2021 with both
service is so new to the platform. having costs around 17 billion.

Profitability Analysis Netflix Cost of Revenues and

Revenues (thousands)
During my profitability analysis I chose two $50,000,000.00
different benchmarks, Paramount Global (Para) $40,000,000.00
and Warner Bros Discovery (WBD). I chose these
$30,000,000.00
two benchmarks because they both have their
own streaming service and are very relevant in the $20,000,000.00
entertainment and media sector making them $10,000,000.00
similar to Netflix. I also feel as though these $-
companies are a better benchmark to something 15 16 17 18 19 20 21
like Disney or Amazon because they are more
Cost of Revenues Revenues

(Netflix Inc., 2021)

7
 companies like these because it slows down the
Because Paramount and Netflix’s spending was so production of the media you are producing.
similar, I decided to use the Net Profit Margin to
see if their spending for their media was Debt to Equity
beneficial. 600.00%
400.00%
Net Profit Margin
200.00%
20.00%
0.00%
15.00%
2015 2016 2017 2018 2019 2020 2021
10.00%
Debt to Equity Netflix
5.00%
0.00% Debt to Equity Warner Bros
-5.00% 2015 2016 2017 2018 2019 2020 2021 Debt to Equity Paramount
-10.00% (Netflix Inc., 2021)
Net Profit Margin PARA Netflix’s debt to equity has decreased over 2019-
2021 making it a much safer investment relative
Net Profit Margin NFLX
to Paramount. I feel as though this is especially
Net Profit Margin WBD important in relation with their content spending
(Netflix Inc., 2021) increasing each year. Looking at the companies
Again, Netflix and Paramount are relatively similar Current Ratio we see that Netflix barley has
in Net Profit Margin as well. I think this is good enough assets to cover the current debts they are
proof that the cost of content they are releasing taking on. Again this becomes a problem,
relates to the income the company will be able to especially considering the media they produce
earn that year. Netflix’s case though the income is takes months to produce. Paramount and Warner
mostly from the members they have, in Bros are better in this regard though since their
Paramount’s case they have revenues from ratio is higher. I feel as Netflix’s case is less
licensing, memberships and distribution of relevant of a problem because the large majority
content in theaters. of their revenues come from monthly
memberships. Having this constant stream of
Risk Analysis income allows them take on more debt than
To help further understand Netflix’s relation Paramount or Warner Bros.
between the benchmarks I conducted a risk
analysis. I first began with the Debt to Equity ratio. Current Ratio
Content spending is important, but ever since 600.00%
COVID-19 companies should be more aware of the
400.00%
debt they are taking on. I feel as though this is
especially important in the entertainment industry 200.00%
as producing movies and TV shows take months to
0.00%
produce. These forms of media are also very 2015 2016 2017 2018 2019 2020 2021
dependent on the people producing them. Having
debt in this case would be especially bad for Current Ratio Netflix
Current Ratio Warner Bros
Current Ratio Paramount

(Netflix Inc., 2021)

8
In conclusion Netflix promotes high risk when
taking in account it’s current assets to liabilities.
Even though their monthly memberships allows
them to take on more debt, relying on this idea Projected Revenues
especially when new subscribers are starting to
Year Revenues %YoY Difference
stagnate is not ideal.
2022 $36,026,989.28 21.31% $6,329,145.28
2023 $43,762,176.08 21.47% $7,735,186.80
Intrinsic Valuation
2024 $53,215,761.39 21.60% $9,453,585.31

Cost of Equity 2025 $64,769,493.40 21.71% $11,553,732.00

Using a regression of the excess stock return and 2026 $78,889,926.95 21.80% $14,120,433.55
the market risk premium from January 2017 to 2027 $96,147,263.67 21.88% $17,257,336.72
September 2022 returns a beta of 1.24 with a 2028 $117,238,377.46 21.94% $21,091,113.79
standard error of 0.2513. Since Netflix’s service 2029 $143,014,955.17 21.99% $25,776,577.70
spans more than 190 different countries the
2030 $174,517,888.80 22.03% $31,502,933.64
equity risk premium was found by taking the (Netflix Inc., 2021)
equity risk premium for four different countries
representing the sector revenue split that Netflix Annual Revenue (thousands)
uses. The four countries used were the United $90,000,000.00
States with a equity risk premium of 4.24%, $80,000,000.00
United Kingdom with a equity risk premium of $70,000,000.00
4.84%, Brazil with a equity risk premium of 7.21%, $60,000,000.00
and Japan with a equity risk premium of 4.94%. $50,000,000.00
Multiplying the equity risk premiums by the $40,000,000.00
weight of revenue their respective sector and then $30,000,000.00
adding those weighted equity risk premiums gives $20,000,000.00
the 4.84% I used for my equity risk premium. The $10,000,000.00
Cost of equity using the beta of 1.24 and the $-
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
2026
equity risk premium of 4.48% gave 10.26%.

Revenue Projection (Netflix Inc., 2021)

Revenue growth for Netflix has been consistent
ever since Netflix transitioned from it’s DVD-based Free cash flow
business model to Video on Demand. Because of The projected free cashflows were not as
this I decided to use the revenues from 2007 to consistent to predict as the revenues were. The
2021. I did the same timeframe with the Constant main factor in the randomness was the amount of
Annual Growth of Revenues ended up being new debt and debt repaid. The margins of these
25.719%. Ted Sarandos has a good reputation values were very inconsistent. To account for the
when it comes to transitions in Netflix. Another inconsistency over the 10 years I took the margin
important consideration was the survey of debts repaid and new debt from 2012 and used
conducted by Standard and Poors saying, that 36% them for 2022. I repeated this pattern for all the
of non-Netflix owners would consider buying a ad- years leading up to 2032. Another inconsistency
based membership for a cheaper price. (Shafer, from a normal free cashflow of equity model was
2022) The one discrepancy that I could not find the growth rate I used. I felt as though the
background on was how much ad revenue Netflix subscriber growth rate would be a better measure
would make off their plan. for the growth of the company as subscriber

9
revenue makes up the majority of Netflix’s Relative Valuation
revenues.
Using the same benchmarks, Paramount, and
Growth Rate Warner Bros, I conducted a relative valuation. For
my market multiple I used price to earnings then
Year 2022 2021 2020 adjusted based off the free cash flows of equity
Subscribers for each benchmark. After conducting the
(thousands) 223085 213563 195155
adjustment, I found that Netflix was currently
Growth 4.46% 9.43% priced fairly, relative to the market sector it is in.
Average Growth 6.49%
(Netflix Inc., 2021)
The subscriber growth rate was found by taking Conclusion
the average growth of the past two years (starting
in 2020) of memberships ending the third quarter. Rating
I did this to get the most recent possible growth in BUY
subscriber count, as of 2021 subscriber growth
has started to stagnate. Running the free cashflow Price Target
of equity projection using the subscriber growth 462.56
rate and cost of equity over a ten-year period
gives a value of equity of $225,767,447,962 and a Implied Upside: +44.36%
present value of terminal value of
$81,336,937,117. With a reasonable range between 418.13 - 506.98

Projected Earnings per Share Important Assumptions

Each Year
$60.00 All of the growth rates assumptions take in
$50.00 consideration that the revenues and
$40.00 subscription growth is not as strong as it was
$30.00
earlier on in the company’s lifespan. Even
though Netflix issued the new ad-based
$20.00
subscription and has plans to innovate in the
$10.00
streaming space I believe the growth will stay
$0.00
2020 2022 2024 2026 2028 2030 2032
relatively the same as it has the past few years.
(Netflix Inc., 2021)
With 445.3 million shares outstanding Netflix has
an implied yield of $462.56 per share. When
compared to Netflix’s current share price of
$320.41 the upside of the projection is 44.36%.

10
11
12
Revenue and Free Cashflow to Equity Projection

13
Bibliography

Iqbal, M. (2022, October 27). Netflix Revenue and Usage Statistics (2022). Retrieved from
businessofapps: https://www.businessofapps.com/data/netflix-statistics/
Jain, S. (2022, May 8). The Netflix Revolution – History of Netflix (2022 Updated). Retrieved from
VdoCipher: https://www.vdocipher.com/blog/2017/06/netflix-revolution-part-1-history/
Jay, A. (2022, 11 6). Number of Netflix Subscribers in 2022/2023: Growth, Revenue, and Usage. Retrieved
from financesonline: https://financesonline.com/number-of-netflix-subscribers/
Lahiri, A. (2022, November 25). Netflix Goes Aggressive On Gaming Venture To Boost Revenue Stream.
Retrieved from yahoo!finance: https://finance.yahoo.com/news/netflix-goes-aggressive-
gaming-venture-134543410.html
Munson, B. (2019, May 30). Hulu has 82M viewers, and most of them are seeing ads. Retrieved from
fiercevideo: https://www.fiercevideo.com/video/hulu-has-82m-viewers-and-most-them-are-
seeing-
ads#:~:text=The%20company%20said%20it%20now,by%2082%25%20year%20over%20year.
Netflix Inc. . (2022). Proxy Statement and Notice of Annual Meeting of Stockholders. Netflix Inc.
Netflix Inc. (2021). 2021 Proxy Statmetn and Notice of Annual Meeting of Stockholders. Netflix Inc. .
Netflix Inc. (2021, December 31). Netflix Inc. Retrieved from sec.gov:
https://www.sec.gov/ix?doc=/Archives/edgar/data/1065280/000106528022000036/nflx-
20211231.htm
Netflix Inc. (2022, December 4). Plans and Pricing . Retrieved from Neflix Help Center:
https://help.netflix.com/en/node/24926
Netflix. (n.d.). Netflix Basic with ads Plan. Retrieved from Netflix Help Center:
https://help.netflix.com/en/node/126831
Reiff, N. (2022, December 04). How Netflix Makes Money. Retrieved from Investopedia:
https://www.investopedia.com/insights/how-netflix-makes-money/
Shafer, S. (2022, October 18). Netflix subscriber growth returns as ad tier launch looms. Retrieved from
spglobal: https://www.spglobal.com/marketintelligence/en/news-insights/research/netflix-
subscriber- growth-returns-as-ad-tier-launch-
looms#:~:text=After%20shedding%20a%20little%20over,2022%20year%2Dto%2Ddate.
The Org. (2020, July 16). Ted Sarandos . Retrieved from The Org: https://theorg.com/org/netflix/org-
chart/ted-sarandos
Vega, N. (2022, November 2). Netflix is rolling out its $7 ad-supported tier. Here’s how to change your
plan. Retrieved from cnbc.com: cnbc.com/2022/11/02/netflix-ad-supported-plan-how-to-
switch-
faq.html#:~:text=The%20company's%20plan%20arrives%20on,password%20sharing%20on%20i
ts%20platform
Video Streaming App Revenue and Usage Statistics (2022). (2022, July 20). Retrieved from
BusinessofApps: https://www.businessofapps.com/data/video-streaming-app-market/
WSJ. (2022, November 8). Netflix explores investing in live sports, bids for streaming rights- WSJ.
Retrieved from yahoo!finance: https://finance.yahoo.com/news/netflix-explores-investing-live-
sports- 193421108.html?fr=sycsrp_catchall
Yahoo Finance. (2022, December 04). Netflix Inc. Retrieved from Yahoo Finance:
https://sg.finance.yahoo.com/quote/nflx?ltr=1

14